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THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 


FROM  THE  LIBRARY  OF 

PROFESSOR 
CARL  COPPING  PLEHN 

I 867-1 945 


Digitized  by  the  Internet  Archive 

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BUSINESS  ADMINISTRATION 
TEXT  BOOKS 


Business  Economics. 
Business  Organization  and  Management. 
Advertising  and  Salesmanship. 
Trade  and  Commerce. 

Transportation. 

Money,  Banking  and  Insurance. 

Investments  and  Speculation. 

Accounting. 

Auditing  and  Cost  Accounting. 

Business  Law  and  Legal  Forms. 


BUSINESS 
ADMINISTRATION 

THEORY,  PRACTICE  AND  APPLICATION 


Editor-in-Chief 

Walter  D.  Moody 

General    Manager,    the    Chicago   Association    of    Commerce, 
Author,  "Men  Who  Sell  Things." 

Managing  Editor 

Samuel  MacClixtock,  Ph.  D. 

Editorial  and  Educational  Director, 
La  Salle  Extension  University 


This  Zi'ork  is  especially  designed  to  meet  the  practical  every-da\  needs  of 
the  active  business  man,  and  contains  the  fundamental  and  basic 
principles  upon  leliich  a  successful  business  is  founded,  con- 
ducted and  maintained.     To  those  looking  foncard  to 
a  business  career,  this  work  forms  the  basis 
for  a  practical  and  systematic  course  in 
"Business  Administration" 


published  by 
la:  SALLE  EXTENSION  UNIVERSITY 

CHICAGO 


Copyright,    1911. 
ItASAlAJS    EXTENSION    UNIVERSITT. 


GIFT 


F5i5l 


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BUSINESS   ORGANIZATION   AND 
MANAGEMENT 

fl  This  treatise  has  been  especially  prepared  by  Mau- 
rice H.  Robinson,  Professor  of  Commerce,  University 
of  Illinois.  It  is  supplemented  by  various  articles, 
such  as  New  Jersey's  Corporate  Policy  by  Hon.  James 
B.  Dill,  Judge  Court  of  Errors  and  Appeals,  Author 
Business  Corporation,  etc. ;  Organization  Corporation 
and  Receiverships,  by  Thomas  L.  Green,  former  Presi- 
dent New  York  Audit  Company ;  by  Documents  illus- 
trating Business  Organizations ;  and  by  the  writings  of 
other  industrial  organizers  and  business  managers. 
The  work  is  a  modern,  popular  and  authoritative  ex- 
position of  all  phases  of  organization  and  management. 
It  contains  many  practical  ideas  on  executive  and  ad- 
ministrative efficiency  in  all  departments  of  business. 
It  is  also  arranged  to  serve  as  a  quick  reference  work, 
and  includes  a  complete  table  of  contents,  a  compre- 
hensive index  and  test  questions. 

Walter  D.  Moody, 

Editor-in-Chief. 


168 


INTRODUCTION  TO  BUSINESS  ADMINISTRATION. 

BY  WALTER  D.  MOODY. 

General  Manaper,  The  Chicapo  Association  of  Commerce. 
Author  of  "Men  Who  Sell  Things." 

"The  recipe  for  perpetual  ignorance  is:     Be  satisfied  with  your  own 
opinion  and  content  zvith  your  knowledge." 

This  is  an  era  of  the  greatest  commercial  ac- 

Business  a  contest      tivity  the  world  has  ever  known.    The  devel- 

of  wits  opment  of  business  is  one  of  the  marvels  of 

the  new  century.     A  few  years  ago  science, 

as  a  factor  in  commerce,  was  little  known  and  less  appreciated.     The 

amazing  advantages  to  business  of  intellectual  attainments  were  utterly 

without  recognition.    Today,  however,  business  has  become  a  contest  in 

which  the  quickest  perception  wins,  thus  transforming  the  counting  room 

into  a  battle  ground  upon  which  brain  matches  brain  for  supremacy  and 

success. 

[\h,  that  enchanting  word,  S-U-C-C-E-S-S.    It 
Success — educated       does  not  require  a  magic  key  to  unlock  the 
enthusiasm  door  to  business  efficiency.     There  is  nothing 

mystic,  nothing  mysterious  in  the  applied 
method  of  the  really  resourceful  men  in  this  day  of  great  successes,  of 
marvelous  achievements  in  business  enterprise.  The  sum  total  is  con- 
tained in  two  words,  words  that  electrify,  nevertheless.  EDUCATED 
ENTHUSIASM. 

The  most  formidable  barrier  to  progress  has 
Changing  conditions     always  been  the  senseless  opposition  of  those 
make  to  whom  it  would  be  of  the  greatest  benefit, 

opportunities  Changing  conditions  are  the  order  of  the  day, 

for  enlightenment  has  worked  wonders.  In 
olden  times,  a  man  of  affairs  was  obliged  to  giiard  his  property  and  his 
loved  ones  by  building  a  moat  around  his  house  and  posting  sentinels  in 
and  around  his  estate.  The  time  is  not  long  past  when,  because  of  preju- 
dice, perversity  or  ignorance,  many  men  believed  that  opportunity  knocked 
only  once  at  any  man's  door.  Today,  thanks  to  deeper  insight,  most  men 
believe  that  life  itself  is  opportunity;  that  the  very  air  we  breathe  is 
opportunity ;  that  each  new  day  presents  broader  opportunities  for  accom- 


INTRODUCTION. 

pushing  more  because  of  better  directed  energy.  This  is  not  alone  the 
accepted  dogma  of  the  man  who  is  making  his  way  in  the  world.  It  is 
the  creed,  doctrine,  tenet  or  religion,  whichever  you  may  care  to  term  it, 
of  the  great  captains  of  industry  everywhere. 

The  more  successful  the  man,  the  more  does 
New  ideas  count  he  think,  study,  plan,  as  a  part  of  his  daily 
occupation  in  the  development  of  the  affairs  in 
which  he  is  interested.  Newer  and  better  ways  to  get  things  done  is  the 
business  standard  employed  today  by  successful  men  in  all  lines.  Only 
yesterday  if  a  man  of  genius  advanced  a  new  idea,  he  found  himself 
ridiculed  and  his  innovation  opposed  on  all  sides  because  it  was  a  new 
idea.  Today,  it  is  different.  The  man  of  ideas  counts  in  the  trend  of 
affairs  as  he  has  never  counted  before. 

Everything  has  a  subjective  reason.    Progress 
Must  keep  step  with     is  acting  as  a  mighty  dynamic  force  in  chang- 
changing  times  ing  men's  viewpoint  of  life  and  things.    Sup- 

pose the  stroke  oar  on  a  varsity  crew,  while  in 
a  race  against  an  opposing  crew  from  a  competitive  institution,  should 
suddenly  stop  rowing  in  harmony  with  his  associates  and  begin  to  row 
backwards — that  crew  would  not  get  very  far  without  trouble.  Suppose 
a  lawn  mower  should  be  reversed  and  forced  to  run  backwards — there 
would  not  be  much  progress  made  in  cutting  grass  on  that  lawn.  Varsity 
crews  and  lawn  mowers  must  move  forward.  Business  men  must  ad- 
vance with  the  times. 

A  great  merchant  in  Chicago  tells  a  good  story  of  his  youth.  He  was 
a  member  of  a  state  regiment  of  militia.  On  a  certain  occasion,  his  com- 
pany was  sent  out  on  dress  parade.  An  old  maiden  aunt,  with  consider- 
able colonial  blood  in  her  veins,  took  much  pride  in  her  nephew  and  his 
company.  While  reviewing  the  parade,  she  was  suddenly  heard  to  ex- 
claim :  "Why,  every  single  man  in  that  company  is  out  of  step  excepting 
my  nephew."  Alost  men  who  fail  to  get  on  in  the  world  do  not  realize 
that  success  lies  in  keeping  step — in  making  progress  with  changing  condi- 
tions. They  generally  make  the  mistake  of  thinking  that  the  world  and 
everything  in  it  is  out  of  harmony  with  themselves. 

A  business  man  of  successful  experience  rea- 
New  ideas  worth        Hzes  that  ideas — newer  and  better  principles  o£ 
searching   for  conducting  business — are  of  the  greatest  value, 

and  he  also  knows  that  it  pays  him  to  search 
for  them.  The  same  old  way  of  doing  things  cannot  longer  be  success- 
fully employed  month  after  month  and  year  after  year  as  under  the  old 
regime.  The  business  man  must  be  modern,  up-to-date.  The  physician 
or  lawyer  finds  that  to  compete  successfully  he  is  compelled  to  search 


INTRODUCTION 

without  ceasing;  in  order  that  he  may  comprehend  the  advancement  in 
treatments  or  procedures.     "To  the  man  who  fails  belong  the  excuses." 

President  James,  of  the  University  of  Illinois, 

Demand  for  trained      was  asked  if  there  was  any  demand  from  busi- 

men  ness  houses  for  college-bred  men.     His  reply 

was :     "The  demand  has  been  far  in  excess  of 

the  supply  since  courses  in  business  administration  were  established  in 

our  institution  seven  years  ago.     Each   year  has  brought  many  more 

requests  than  we  have  men  to  recommend."     Ten  years  ago  President 

James  would  have  been  ridiculed  for  advancing  this  new  idea  for  the 

establishment  of  a  school  of  commerce  in  connection  with  a  university. 

Today,  commercial  schools  are  a  part  of  the  regularly  established  courses 

of  nearly  all  of  the  great  universities  of  our  country.    Men  trained  in  the 

theory,  practice  and  administration  of  business  will  always  occupy  the 

best  positions  and  will  always  command  the  greatest  salaries. 

All  men  fail  at  times  in  the  accomplishment  of 

Value  of  new  ideas      satisfactory  results  in  the  various  enterprises 

in  in  which  they  are  engaged,  without  being  able 

business   emergencies    to  give  an  explanation.     The  principles  that 

have  been  applied  successfully  for  many 
years  seem  apparently  to  have  counted  for  nothing.  It  is  frequently  evi- 
dent that  in  such  cases  a  very  insignificant  thing,  a  mere  oversight  per- 
chance, has  been  the  direct  cause  of  the  failure.  To  be  able  to  put  the 
finger  on  the  precise  cause  of  the  lack  of  success  in  one's  method  would 
locate  the  cause  of  the  disaster.  Then  it  is  that  a  real  appreciation  of 
new  ideas  is  fully  realized. 

Failure  is  more  often  chargeable  to  a  refusal 
Men  paid  for  what      to  learn  by  mistakes  how  to  avoid  them  than  it 
they  know — not         is   in  making  them.     Experience  is   a   good 
for   what   they   do      teacher,  but  who  can  deny  the  value  to  be 
gained    in   learning    from   the    experience   of 
others,  for  we  cannot  all  have  the  same  experience  or  the  same  view  of 
similar  experiences.    There  are  many  pathways  to  success,  but  the  road 
of  ind!vidual  experience  is  narrow  and  rugged.     It  is  a  commonly  ac- 
cepted fact  that  for  every  ten  dollars  a  high-salaried  man  draws,  he  re- 
ceives nine  dollars  for  what  he  knows  and  one  dollar  for  what  he  does. 
On  the  same  basis  the  successful  business  man,  employing  a  large  force 
of  other  men,  realizes  that  his  own  greatest  worth,  as  applied  to  his 
affairs,  lies  not  so  much  in  what  he  can  do  himself  as  how  much  he  can 
encourage  his  employes  to  do.    In  either  case,  his  own  personal  knowl- 
edge is  the  power  behind  the  throne. 


INTRODUCTION 

The  man  who  would  secure  the  largest  net  re- 
Knowledge  in  excess    turn  from  his  individual  effort  in  the  field  of 
of  present  needs        endeavor,  and  he  who  would  realize  the  great- 
necessary  est  possible  advantage  from  the  efforts     of 
those  under  his  command  must,  of  necessity, 
possess  knowledge — indispensable  perception  far  in  excess  of  the  needs  of 
the  moment.     Discernment,  like  a  bank  account,  soon  runs  out  if  it  is 
overdrawn  or  if  it  is  not  continually  replenished.    In  business  the  "check- 
ing system'*  of  knowledge  is  the  sort  of  account  that  pays  best — not 
the  "savings  account  system."    Knowledge  that  is  simply  corked  up  and 
allowed  to  accumulate  cobwebs  and  rust  can  avail  nothing.    The  sharpest 
vinegar  is  procured  by  constantly  replenishing  the  old  stock  with  new. 

Reliable  statistics  prove  that  only  about  ten 

90%  failures  per  cent  of  all  people  who  engage  in  business 

vs.  are  successful   and  make  money;   the   other 

10%   moneymakers      ninety  per  cent  become     insolvent     and  fail. 

That  is,  they  do  not  actually  encounter  the 

sheriff,  or  go  into  the  hands  of  a  receiver,  but  they  fail  nevertheless  to 

succeed  in  the  sense  of  making  money,  and  what  other  possible  reason 

can  anyone  have  for  engaging  in  business  if  not  to  accumulate  money? 

iWhy  do  so  many  fail?    Ask  any  credit  man 
Failures  due  to  lack      and  he  will  tell  you  that  it  is  not  because  of 
of  intellectual  the  lack  of  capital,  or  other  material  resources, 

capacity  but  it  is  due  primarily  to  a  lack  of  intellectual 

capacity,  the  sort  of  brains  that  dig  and  work 
and  sweat  until  they  find  a  way  to  accomplish  things ;  brains  that  go  to 
the  bottom  of  things;  brains  that  are  always  looking  for  better  results; 
brains  that  never  abandon  a  problem  until  they  have  found  a  way  to 
solve  it.  A  friend  once  told  me  that  he  inquired  of  the  manager  of  a 
house  employing  some  three  hundred  traveling  men  how  many  salesmen 
they  had.  The  manager  replied,  "Three."  My  friend  asked,  "How's 
that?  I  am  told  your  force  of  traveling  men  numbers  nearly  three  hun- 
dred." "Ah,  that  is  quite  different,"  replied  the  manager ;  "we  have  two 
hundred  and  ninety-seven  traveling  men,  but  only  three  salesmen." 
Quite  likely  that  manager's  estimate  was  intended  to  be  taken  figuratively 
rather  than  literally,but  it  serves  to  illustrate  the  fact  that  in  this  great 
United  States  there  are  millions  of  men,  young,  middle-aged  and  old,  who 
are  content  to  plod  along  in  a  mediocre  sort  of  way,  heedless  or  unmindful 
of  the  fact  that  opportunity,  knowledge,  possibilities,  are  calling,  calling, 
calling  to  them  to  come  up  higher.  There  are  hundreds  of  thousands  of 
other  men  engaged  in  business  who  sit  idly  by  while  their  trade,  like  the 


INTRODUCTION 

sands  in  the  hour  glass,  slowly  ebbs  away,  and  eventually  is  absorbed  by 
their  more  progressive  business  neighbors. 

There  is  still  another  vast  army  of  business 
Moneymaking  and  men — salesmen,  clerks  and  wage-earners  of  all 
business  literature  classes — who  are  beginning  to  catch  a  glimpse 
of  the  dawning  of  a  new  business  era,  the 
greatest  the  world  has  ever  known,  an  era  impregnated  with  possibilities 
and  opportunities  for  those  who  are  ready  with  wicks  trimmed  and  oil 
in  their  lamps.  To  the  earnest  latter  class  which  is  really  desirous  of 
profiting  by  the  experience  of  others,  there  is  no  need  of  elaborating  the 
possibilities  embodied  in  this  course  of  reading  in  Business  Administra- 
tion. This  set  of  books,  containing  valuable  business  data  on  many  sub- 
jects, thousands  of  pages  telling  the  story  of  success  illustrated  by  trained 
men  whose  names  are  respected  everywhere,  is  intended  to  reach  all 
classes.  There  is  absolutely  nothing  in  print  that  can  even  approach  or 
can  begin  to  compare  with  it  in  value  as  a  reference  library  for  business 
men  or  excel  it  as  a  complete  course  of  instruction  for  any  man  desirous 
of  making  the  best  of  his  possibilities  and  opportunities  in  the  kaleido- 
scopic age  through  which  the  business  world  is  now  moving. 

The  more  practical  the  ideas,  the  better  the 
Practical  ideas  best  basis  for  good  work.  Not  long  since,  busi- 
ness men  generally  pooh-poohed  the  idea  of 
employing  in  the  conduct  of  their  business  anything  new,  which  was  taken 
from  the  writings  and  experience  of  others,  such  as  is  contained  in  this 
remarkable  series,  contributed  to  by  some  of  the  brightest  minds  in  the 
business  world  today.  There  is,  however,  in  these  days  unmistakably  a 
hungering  and  thirsting  for  just  this  new  sort  of  literature.  It  fills  a  long- 
felt  need — fills  it  exactly,  completely,  satisfactorily.  Being  the  author  of  a 
work  on  salesmanship  which  has  had  a  countrywide  circulation,  I  hare 
been  literally  besieged  bv  business  men  everywhere  asking  me  to  recom- 
mend books  treating  of  successful  business  methods,  and  have  been  cha- 
grined to  find  how  limited  was  the  supply.  The  man  who  formerly  was 
prejudiced  against  such  sources  of  information  must  now  step  aside 
and  make  way  for  progress  or  unite  with  the  popular  demand  for  more 
education  and  better  methods. 

Show  me  the  man  who  says  he  has  no  pa- 

Cannot   afford  tience  for  such  things,  and  I  will  show  you  a 

vs.  man,  like  the  stroke  oar  and  the  lawn  mower, 

can  afford  who  does  not  believe  in  moving  forward  in 

progress.    Show  me  the  man  who  says  he  has 

no  time  to  read  of  new  methods  and  principles,  and  I  will  show  you  the 

one  who  utterly  fails  to  perceive  that  familiarity  with  business  literature 

of  this  kind  means  pecuniary  advancement.    Show  me  the  man  who  says 


INTRODUCTION 

he  cannot  afford  to  invest  in  such  a  set  of  books,  and  I  will  show  you 
one  who  apparently  CAN  afford  to  waste  his  energy  in  misdirected 
effort — that  energy  and  effort  which  are  to  every  wage-earner  and 
tradesman  both  his  stock  in  trade  and  his  invested  capital. 

Someone  has  said,  "There  are  three  kinds  of 
Failures  people  in  the  world — the  Can'ts,  the  Won'ts 

unnecessary  and  the  Wills.    The  first  fail  at  everything; 

the  second  oppose  everything;  the  third  suc- 
ceed at  everything-."  I  would  add  a  fourth  kind — the  largest  class  of  all 
— the  Don't  Trys,  the  "Oh-what's-the-use,"  "It-doesn't-interest-me"  sort 
of  people.  Their  name  is  legion ;  their  fault  is  lack  of  confidence.  Knowl- 
edge is  the  greatest  inspiration  of  confidence  to  be  found  on  earth.  You 
may  not  personally  be  held  in  the  hope-paralyzing  bondage  that  produces 
the  "Oh-what's-the-use,"  or  "I'm-not-interested"  germ,  but  if  you  are  not, 
you  are  exceptional.  Most  people  are,  and  that  is  the  reason  that  such 
persons  are  just  about  what  luck,  good  fortune  or  chance  make  them, 
succeeding  if  fortune  favors  them,  failing  if  they  are  left  to  depend  upon 
their  own  resources.    Result :     Nine  fail  where  one  succeeds. 

It  is  very  fortunate,  indeed,  for  most  men  that  so  much  of  their  happi- 
ness depends  upon  success.  There  is  nothing  on  earth  quite  so  terrible 
to  think  of  as  failure,  especially  that  due  to  lack  of  effort,  unless  possibly  it 
be  the  failure  of  a  man  who  lacks  the  courage  or  initiative  to  try  to  make 
the  most  of  himself,  and  thus  lets  his  best  opportunities  escape  him.  And 
this  last  is  really  the  most  pitiful  thing  that  can  befall  a  man.  It  is  well 
enough  to  plan  opportunities,  but  if  we  had  the  wisdom  to  take  advantage 
of  such  opportunities  as  naturally  come  to  us,  results  would  more  often  be 
found  in  the  balance  on  the  right  side  of  the  ledger.  And  so  I  am  of  the 
opinion  that  a  clear  explanation  of  why  a  very  large  class  of  people  do  not 
succeed  is  found  in  some  of  these  expressions — "I  don't  care,"  "I  can't," 
"It  doesn't  interest  me/*  or  "Oh,  what's  the  use." 

One  of  the  great  objects  set  forth     in  this 
Basis   of   all   busi-      Business  Administration  series  is  to  supply  the 
ness  success  positive  energy  which  begets  courage,  confi- 

dence, initiative  and  success.  We  want  to 
make  you  feel  the  necessity  of  doing  some  reading,  a  little  plain  think- 
ing, and  to  make  as  clear  as  possible  the  important  things  that  are  in- 
volved in  the  serious  but  very  fine  game  of  business. 

With  business  becoming  with  each  succeeding  day  more  and  more  of 
a  science,  it  is  high  time  to  understand  what  is  essential  to  it.  Speaking 
of  the  subject  of  "Organized  Business,"  a  great  authority  recently  said, 
"It  is  time  even  for  business  men  to  understand  business."  Again,  the 
purpose  of  this  course  in  Business  Administration  is,  if  possible,  to  meas- 
ure the  power  and  principles  of  business,  to  trace  their  ramifications,  de- 


INTRODUCTION 

fine  their  elements,  get  hold  of  their  vital  fundamentals,  and  so  compre- 
hend them,  both  in  technical  detail  and  as  a  mighty  unit.  And  I  am  confi- 
dent we  have  done  all  this.  I  find  that  at  the  foundation,  the  machinery 
of  business  is  simple,  but  whether  it  is  plain  or  complicated,  all  who  would 
succeed  must  make  every  efTort  to  comprehend  it  thoroughly.  All  I 
care  to  emphasize  at  present  is  the  great  truth  that  knowledge,  estab- 
lished and  classified,  is  the  basis  of  all  business  success.  This  is  clearly 
established  in  this  course  of  reading,  and  I  am  trying  to  incite  your 
imagination  in  writing  of  its  merits  just  as  I  would  endeavor  to  enable 
you  to  realize  it  if  I  could  talk  to  you  personally  right  across  my  desk. 
The  observant  man  can  see  clearly  the  things  I  am  talking  about,  but  to 
most  men  the  mind's  eye  perceives  not  by  observation,  but  only  when  the 
imagination  is  stimulated.  So  I  would  stir  all  men  to  look  earnestly  into 
these  things,  with  a  view  to  their  personal  betterment. 

Business  is  far  more  than  business  as  it  is  com- 
OBusiness  axioms        monly  understood.     It  is  a  science,  and  it  is 
simple   to  the  eager,  practical  minds  of  business  men  that 

understand  we  shall  endeavor  to  convmce  first  of  that 

fact,  and  our  reasons  for  addressing  those 
principally  concerned  are  especially  good.  Why?  I  have  found  that  in 
writing  about  business  whenever  I  was  able  to  make  the  principles  so 
plain  that  business  men  understood  them,  everybody  else  did,  so  it  is  to 
be  expected  that  if  business  axioms  can  be  made  simple  enough  for  busi- 
ness men  to  understand  them,  everyone  will  apprehend  them.  Every- 
body.   l\nd  it  is  everybody  that  we  are  attempting  to  reach. 

For  nearly  thirty  centuries  men  have  recog- 

Knowledgc  ia  nized  the  concrete  wisdom  of  Solomon's  prov- 

power  erb:    "A  wise  man  is  strong;  yea,  a  man  of 

knowledge  increaseth  in  strength."       Yet  we 

have  been  slow  in  making  its  application  universal  to  the  race.    But  we 

are  beginning  to  understand  that  the  power  inherent  in  knowledge  applies 

as  well  to  commercial  and  industrial  as  to  scholastic,  political  and  social 

life,  as  well  to  the  counting  room  as  to  the  pulpit,  as  well  to  the  shop  as 

to  the  university,  as  well  to  the  farm  as  to  the  bar.    Knowledge  is  power 

and  is  the  only  source  of  real  intellectual  sovereignty  that  the  Creator  has 

ever  entrusted  to  men. 

In  conclusion,  I  would  say  that  these  words  are  addressed  to  the 
business  men  of  America,  and  this  designation  includes  the  banker  and 
his  clerks,  the  farmer  and  his  sons,  the  lawyer  and  the  law  student,  the 
financier  and  the  man  who  sells  bonds  and  stocks,  the  merchant  and  his 
clerk,  the  accountant  and  the  bookkeeper,  the  manager  and  his  assist- 
ants—the ambitious  young  men  of  the  Twentieth  Century  type,  contem- 
plating the  pursuit  of  any  business,  trade  or  occupation. 


CONTENTS 

BUSINESS  ORGANIZATION   AND  MANAGEMENT. 

PAGE 

Modern  Business  Orjjanization  and  Management. — 

By  Maurice  H.  Rdbinson 1 

I.  Fundamental  Principles —  1 

The  Nature  of  Business — Individualistic  versus  Social  Economy — 
Business  Organization — The  Management  of  Business  Organizations — 
Factors  of  Wealth  Production— Business  Units— Methods  of  Conduct- 
ing Business — Industrial  Groups — Political  Conditions  and  Business 
Organization— Social    and    Industrial    Conditions    Affecting    Business. 

II.  The  Organization  of  Business  Enterprises —  28 

/  Classes  of  Organizations— The  Individual  Proprietorship — The  Part- 
nership— The  Articles  of  Co-Partnership — The  Corporation— The 
Corporate  Characteristics— Classes  of  Corporations— Advantages  and 
Disadvantages. 

III.  The  Formation  of  the  Corporation —  56 
Promotion — The  Choice  of  a  State — The  Process  of  Formation— The 
Capitalization— The   Charter— Xame   of   the   Corporation— The   Object 

or  Purpose  of  the  Corporation— The  Capital  Stock— Other  Essential 
Features — The  By-Laws. 

IV.  Internal  Organization  of  the  Corporation —  84 
The  Bondholders— The  Stockholders— Liabilities  of  Stockholders— The 
Creditors— The  Directors— The  Directors  as  Managers— The  Directors 

and  the  Stockholders— The  Directors  and  Vacancies — Liabilities  of 
Directors — The  Corporate  Officers. 

V.  Organization  for  Operation —  115 
The    Proprietorship   and   the    Operating   Organization — General    Prin- 
ciples of  Organization— The  Executive— The  Single  versus  the  Plural 
Executive— Responsibility  to  the  Proprietorship— The  Function  of  the 
Executive— Functional     Organization— The     Legal     Department— The  ^ 
Accounting  Department — The  Division  of  Accounts — The  Division  of 
Credits— The    Division   of   Collections— The   Purchasing  Departmcnt-T>^ 
The  Ore  and  Coal  Department— The  Manufacturing  Department— The 
Experimental    Laboratory— The    Drafting   Room— The    Power    Plant— 

The    Tool    Room— The    Shop— The    Foremen— The    Workmen— The 
Sales     Department^Advertising— Estimating— Selling— Ordering— The 
''  Brokerage    System— The    Commfssion    House — The    Wholesaler— The 
Retailer— Direct  Selling— The  Traffic  Department 

VI.  Inter-Relations  of  Business  Enterprises —  168 
The  Association— The  Chamber  of  Commerce— The  Merchants'  Asso- 
ciation— The  Illinois  Manufacturers'  Association — The  Combination — 
Price  Combinations — Produce  Combinations — Geographical  Combina- 
tions— Combinations  for  Sharing  Business — Combinations  for  Sharing 
Profits— The  Trust- The  Nature  of  the  Trust— Its  Disadvantages— The 
Holding  Corporation— Its  Structure — Its  Control  over  Subsidiary  Cor- 
porations— The  Leasing  Company— The  Community  of  Interests— The 
Merger. 

i 


ii  CONTENTS 

VII.  Business  EpFiaENcy —  18<3 

Business  Efficiency  versus  Technical  Efficiency — The  Cost  of  Produc- 
tion— Efficiency  in  Investment — Plant  Location — The  Factory — 
Power,  Heat  and  Light — Investment  Accounting — Raw  Materials — The 
Efficiency  of  Operation — The  Labor  Problem — The  Driving  Method 
— The  Piece  Wage  System — The  Bonus  and  Premium  Systems — Profit 
Sharing — Participation  in  Ownership — The  Pension  System — The 
Problem  of  Prices — The  Problem  of  Management— The  Tests  of  Effi- 
ciency— How  Accountancy  Assists  the  Management 

Railroad  Organization, 

By  George  T.  Sampson 225 

Organization  of  a  Purchasing  Department  on  Railroad  Systems. 

By  Edward  Norton  Chilson 244 

The  Promoter  in  Modern  Business. 

By  Harrison  S.  Smalley 257 

The  Financiering  of  Trusts. 

By  Charles  S.  Fairchild 276 

The  Relation  of  the  Financial  Trust  Company  to  the  Industrial  Trust 
Company, 
By  L.  Walter  Sammis 287 

Some  Aspects  of  New  Jersey's  Corporate  Policy. 

By  James  B.  Dill 321 

Corporation  Reorganizations  and  Receiverships. 

By  Thomas  L,  Greene 345 

Dissolution  of  a  Private  Corporation. 

By  William  Allen  Wood 372 

Documents  Illustrating  Business  Organization 375 

Quiz  Questions  487 


MODERN  BUSINESS  ORGANIZATION  AND  MANAGE- 
MENT. 

BY  MAURICE  H.  ROBINSON,   Ph.  D. 

\r,.  L.,  Dartuidutli  College,  ISOO;  Siiperinteiidcnl  Puljlic  Schools,  Wahpeton, 
N.  D.,  and  Madclia,  Minn..  lS'.)()-(i;  M.  A.,  Darlniuiith  College,  1897;  Ph.  D., 
Vale,  1902;  As.sistant  in  I'olitical  Science,  Dartmouth  College,  1897-8;  In.structor 
in  Political  Economy,  Yale,  1899-1902;  Professor  of  Industry  and  Transporta- 
tion, University  of  Illinois,  1902 — ;  Special  Expert  Agent  of  the  Census  P.ureau, 
190.?;  Author  of  Trusts,  Yale  Review,  Nov.,  1902;  A  History  of  Taxation  in 
New' Hampshire,  1902;  The  Government  Regulation  of  Insurance,  Publications, 
American  Economic  Association.  1907;  The  Legal.  Economic  and  Accounting 
Principles  Involved  in  the  Judicial  Determination  of  Railway  Passenger  Rates, 
Yale  Review.  Feb.,  1908;  Economics  and  Accountancy.  Publications.  American 
Economic  Association.  March,  1909;  Railway  Freight  Rates,  Yale  Review, 
Aug.,  1909;  The  Holding  Corporation,  Yale  Review,  Feb.  and  May,  1910.] 

I.    FUNDAMENTAL  PRINCIPLES. 
The  Nature  of  Business. 

Man  was  created  with  wants,  some  of  wliicli  can  be  satis- 
fied with  objects  found  in  the  material  world.  His  w^ants 
increase  as  they  are  ministered  to  and,  as  he  finds  himself 
able  to  satisfy  more  and  more  completely  the  wants  already 
in  existence,  new  ones  are  developed.  From  the  beginning, 
man  has  been  surrounded  with  materials,  furnished  by  na- 
ture, more  or  less  ready  to  supply  his  needs.  A  few  of  such 
material  objects  are  ready  for  immediate  use  and  are  found 
at  the  places  whore  they  are  w^anted.  In  most  cases,  liow- 
ever,  an  expenditure  of  energy  and  thought  is  necessary 
in  order  to  fit  the  materials  furnished  by  nature  for  man's 
use. 

In  the  first  place,  materials  in  most  instances  need  to 
be  changed  in  form ;  for  example,  ci'ude  rubber  grows  in  the 
forests  of  Brazil,  but  before  it  can  be  used  it  must  go 
through  a  series  of  complex  processes  and  finally  appears 
in  the  fonn  of  rubber  tires  for  vehicles,  and  in  various  other 
forms  whei'o  an  elastic  cushion  is  needed.  Again,  iron  ore 
is  found  fairly  well  distributed  over  the  earth's  surface, 

1 

B— II— 1 


2  MAURICE  H.  ROBINSON 

but  before  it  can  satisfy  the  wants  of  man  it  must  be  con- 
verted into  pig  iron  and  then  into  rails,  axles,  car  wheels, 
bridges,  tools  and  machinery.  A  considerable  portion  of 
the  earth's  surface  is  covered  with  growing  timber;  before 
such  timber  can  be  used  by  man,  however,  it  must  be  cut 
down,  sawed  into  building  material,  and  finally  formed  into 
shops,  houses,  desks,  cabinets,  chairs  and  vehicles.  Clay  is 
a  deposit  distributed  over  a  considerable  portion  of  the 
earth's  surface,  but  it  must  be  transformed  into  brick,  pot- 
tery, and  china  ware  before  it  can  serve  the  wants  of  man. 

In  the  second  place,  the  materials  furnished  by  nature 
are  not  evenly  distributed  over  the  earth,  and  therefore 
need  to  be  transported  from  places  of  the  greatest  abun- 
dance to  those  of  comparative  scarcity.  For  example,  fruit 
grows  abundantly  in  Florida  and  Southern  California.  To 
secure  its  greatest  utility,  the  surplus  fruit  of  the  southern 
states  is  carried  to  the  eastern  and  northern  markets,  where 
otherwise  there  would  be  a  relative  scarcity  of  such  ar- 
ticles of  food.  The  steel  products  from  the  Pittsburg  dis- 
trict are  likewise  distributed  to  all  parts  of  the  world.  Ijum- 
ber  is  transported  from  the  forested  areas  to  the  plains  and 
to  the  cities.  This  work  of  carrying  materials  from  the 
points  of  the  greatest  abundance  to  those  of  relative  scarci- 
ty is  one  of  growing  importance  in  every  civilized  country. 

In  the  third  place,  fruits,  grains,  vegetables  and  manu- 
factured goods  are  produced  in  quantities  at  certain  seasons 
of  the  year  and  need  to  be  stored  in  order  to  insure  contin- 
uous use  from  season  to  season.  This  process  equalizes  the 
supply  from  time  to  time  and  enables  manufactured  goods 
to  be  kept  in  stock  for  the  inspection  of  customers  and  for 
their  convenience  as  to  the  time  of  delivery.  This  particular 
work,  while  important  in  itself,  is  usually  conducted  in  con- 
nection with  manufacturing,  transportation,  or  commercial 
enterprises. 

In  the  fourth  place,  in  the  modem  economic  system, 
goods  are  exchanged  from  their  original  owners,  through 


MODERN  BUSINESS  ORGANIZATION  3 

the  regular  clianucls  of  trade,  to  the  ultimate  eonsiimers. 
For  exaini)le,  the  wheat  c^rowii  on  the  farms  is  sold  to  the 
elevator  companies,  then  to  the  millers,  and  the  Hour  manu- 
factured from  the  wheat  thus  sold  is  again  transferred  to 
the  wholesale  trade,  then  to  the  retailers,  and  finally  to  the 
hake  shops  and  households  where  it  is  finally  consumed. 
Real  estate  in  one  part  of  the  country  is  transferred  from 
the  control  of  speculators  who  have  purchased  it  in  the  hope 
of  making  a  profit  due  to  its  increase  in  value,  to  farmers 
who  cultivate  it  for  the  crops  that  it  will  produce.  All 
such  activities  fall  into  the  general  class  called  trade  or 
commerce  and  have  their  justification  in  the  better  distri- 
bution of  the  world's  goods  resulting  therefrom. 

All  of  the  various  activities  briefly  described  above  are 
known  under  the  general  name  of  business.  Business  may 
therefore  be  defined  as  the  science  and  the  art  of  transform- 
ing, transporting,  transferring  and  storing  the  wealth  furn- 
ished by  nature  in  order  that  the  material  wants  of  mankind 
may  be  more  or  less  completely  satisfied. 

Individualistic  versus  Social  Economy. 

It  is  conceivable  that  each  individual  might  be  assigned 
all  products  upon  a  portion  of  the  earth's  surface.  He 
would  then  have  at  his  hand  land,  water,  forests,  ores,  clay 
and  other  materials  which  the  earth  furnishes  to  mankind. 
Using  the  materials  at  his  hand,  he  could  grow  fruits  and 
grain ;  grind  the  grain  and  pick  the  fruit ;  build  a  hut,  spin 
thread,  weave  cloth,  and  thus  have  all  the  necessaries  of  a 
meager  existence.  Under  these  circumstances  there  \vould 
be  no  sale  of  goods,  no  ti-ansfer  of  pro])erty  rights;  there 
might  be  all  the  processes  of  a  more  or  less  primitive  Ui^e 
of  manufacture ;  there  would  be  transportation  of  materials 
from  one  part  of  the  farm  to  another  part;  there  would  be 
storatje  of  crops  from  the  season  of  plenty  to  the  season  of 
scarcity.  There  would  thus  be  a  complete  individual  eco- 
nomic life  with  all  the  various  activities  which  such  a  life 


4  MAURICE  H.  ROBINSON 

necessitates.  There  would,  however,  be  no  social  economic 
relationships ;  there  would  be  business  activity,  but  no  busi- 
ness organization  in  the  ordinary  sense  of  the  term. 

Such  conceptions  are  useful  for  purposes  of  contrast- 
ing what  might  be  with  the  present  condition  of  business 
life.  From  the  very  beginning  man  has  been  a  social  being 
and  has  worked  out  his  economic  destiny  in  co-operation 
with  his  fellow-man.  From  the  earliest  times  individuals 
began  to  specialize  in  their  work  and  organize  their  indus- 
trial life.  Owing  largely  to  natural  conditions,  some  men 
became  fishermen,  gathering  fish  from  the  rivers  and  the 
sea.  Others  became  huntsmen  providing  the  community 
with  the  flesh  of  beasts  and  of  fowls.  Others  worked  in 
brass  and  the  metals,  providing  the  community  with  weap- 
ons of  defense,  articles  of  usefulness  and  ornament.  Still 
others  tilled  the  soil  and  provided  fruits,  grain  and  vege- 
tables for  the  common  use  of  the  community.  Each  man 
thus  had  more  of  some  one  of  the  articles  than  he  needed 
and  of  others,  none  at  all ;  hence  came  an  exchange  of  the 
surplus  products,  giving  each  man  in  the  community  a 
share  of  the  total  amount  of  goods  produced.  In  order, 
therefore,  to  effect  such  transfers  it  was  necessary  that 
trade,  commerce  and  transportation  be  undertaken  by  a 
part  of  the  community. 

Specialization  brings  those  engaged  in  the  same  line  of 
business  activity  into  close  economic  relationships.  Thus  a 
group  of  men  find  it  desirable  to  build  larger  boats  than  any 
one  man  could  build  or  sail,  and  embark  on  longer  voyages 
in  order  to  find  fish  of  choicer  quality  or  in  greater  abun- 
dance. They  therefore  unite  for  the  purpose  of  undertak- 
ing work  which  no  one  of  them  could  accomplish  working 
alone.  Their  economic  returns  are  thus  together  and  some 
method  of  division  must  be  devised  fairly  satisfactory  to  all 
parties.  Such  important  matters,  a:ffecting  directly  the  eco- 
nomic welfare  of  the  individuals,  cannot  be  left  to  chance, 
and  therefore  the  work  and  the  share  of  each  individual  in 


MODERN  BUSINESS  ORGANIZATION  5 

the  total  pi-odiicts  are  arranged  by  the  various  parties  who 
engage  in  the  enterprise.  Such  an  undertaking  must  be 
properly  organized  and  etlQciently  managed,  to  insure  per- 
manence and  success. 

Business  Organization. 

Organization  consists  in  arranging  parts  each  having 
special  functions  to  discharge  so  that  their  orderly,  harmo- 
nious and  efficient  direction  is  made  possil)le.  This  term  is, 
it  will  be  noticed,  a  very  broad  and  comprehensive  one.  It 
applies  with  equal  facility  to  the  organic  life  of  animals,  of 
individuals  and  of  groups  of  individuals.  Thus  the  race 
horse  is  a  highly  organized  combination  of  chemical  constit- 
uents whose  general  purpose  is  to  secure  both  grace  and 
speed.  Similarly  each  individual  man  is  an  organized 
entity,  endowed  with  grace,  action  and  energy,  and  having 
in  addition  the  ability  to  imagine,  to  remember,  to  con- 
struct and  to  direct.  A  coach  and  four,  filled  with  a  num- 
ber of  passengers,  acting  under  the  impulse  of  a  common 
idea  and  guided  by  the  accurate  eye  and  the  steady  hand  of 
the  driver,  is  an  organization  of  a  complex  type.  A  club 
united  by  common  social  bonds  and  under  the  man- 
agement of  its  officers,  is  a  more  complex  organization 
operating  for  social  purposes.  The  city  is  a  more  or 
less  completely  organized  political  unit  which  fulfills 
its  functions  well  only  when  its  organization  is  harmoni- 
ously developed.  The  nation  is  a  still  more  complex  type  of 
political  organization.  The  British  Empire,  for  example, 
with  its  centralized  government  at  home  and  its  dei)end- 
encies  of  various  kinds  and  sizes  beyond  the  seas,  represents 
the  most  complex  type  of  political  organization  that  has 
been  developed  in  the  world's  history. 

The  bank,  the  factory,  the  wholesale  house,  the  retail 
store— each  is  a  business  organization  of  a  simple  type  The 
clearing  house,  the  board  of  trade^  the  national  manufac- 
turers* associations,  the  railway  freight  associations,  the 


6  MAURICE  H.  ROBINSON 

commercial  combination,  the  trust,  the  holding  corpora- 
tion, are  all  business  organizations  of  a  more  complex 
character. 

All  organizations  are  formed  and  conducted  for  the  good 
of  the  various  constituent  members.  In  the  case  of  a  busi- 
ness organization  the  object  is  the  creation  of  wealth  for  the 
common  good  which  is  afterwards  distributed  among  the 
several  members  of  the  organization.  If  more  wealth  can 
be  created  by  an  organization  than  can  be  created  by  the 
members  working  individually,  the  organization  fulfills  a 
worthy  economic  purpose.  Whether  the  wealth  thus  cre- 
ated is  distributed  fairly  among  the  members  depends 
largely  upon  the  character  of  the  organization  and  the 
facility  with  which  the  several  types  of  organizations  can 
be  formed.  It  is  thus  of  the  utmost  importance  to  the 
social  welfare  of  individuals  that  the  governments  under 
whose  authority  business  organizations  are  formed  place 
no  unnecessary  barriers  in  the  path  of  those  who  are  in- 
strumental in  determining  the  form  which  the  industrial 
organization  assumes.  The  evolutionary  forces  working 
with  peculiar  force  and  efficiency  in  the  business  world 
will,  in  an  upright  and  intelligent  business  constituency, 
insure  the  dominance  and  perpetuity  of  the  most  efficient 
and  the  most  equitable  types  of  business  organizations. 

The  Management  of  Business  Organizations. 

Management  may  be  defined  in  a  general  way  as  the  art 
of  conducting  an  organized  body  with  a  given  purpose  in 
view  for  the  sake  of  accomplishing  some  predetermined 
end.  Business  management  is,  therefore,  the  art  of  direct- 
ing a  business  organization  to  secure  definite  business  re- 
sults. Organization  is  preliminary  to  management;  it  is, 
however,  a  necessary  stage  in  business  development.  More- 
over, efficient  management  is  largely  contingent  upon  the 
character  of  the  organization.  For  example,  using  an  illus- 
tration from  an  earlier  paragraph,  the  horses,  the  coach  and 


MODERN  BUSINESS  ORGANIZATION  7 

the  passengers  must  be  in  haimonious  relations  to  each 
other  to  permit  efficient  management.  A  larp^e  coach,  many 
passengers,  and  a  pair  of  ponies,  would  effectively  prevent 
good  management.  On  the  other  hand,  many  horses,  a 
small  coach  and  many  passengers,  would  be  equally  unman- 
ageable. So  in  the  business  world,  the  organization  should 
be  adapted  to  the  work  to  be  performed  and  all  parts  of  the 
organization  should  be  in  harmonious  relationship.  Such 
a  condition,  while  favorable  to  good  and  wise  manage- 
ment, does  not  always  insure  such  a  desirable  end.  The 
latter  comes  only  as  a  result  of  knowledge  of  the  organiza- 
tion and  the  object  sought,  together  with  experience  in  this 
part  of  the  field  of  business  enterprise.  Management  is, 
then,  first  a  question  of  organization,  and  then  of  the  skill 
and  ability  of  the  manager.  The  more  complex  the  organi- 
zation, the  more  difficult  the  task  of  the  manager  becomes. 
On  the  other  hand,  organizations  ought  to  be  as  complex 
as  the  nature  of  the  work  undertaken  demands.  It  is  al- 
ways unwise  to  attempt  to  make  business  problems  less 
difficult  by  simplifying  the  organization  when  the  nature  of 
the  work  undertaken  is  complex  in  itself.  It  is  far  better 
to  find  an  able  board  of  managers,  one  that  understands  the 
principles  involved  and  is  able  to  make  broad  and  compre- 
hensive plans. 

To  secure  good  and  efficient  management  is  at  once  a 
most  difficult  and  a  most  desirable  task  in  our  business 
activity.  Given  an  opportunity,  that  is,  conditions  where 
new  wealth  may  be  created  by  business  activity,  poor  man- 
agement is  almost  sure  to  result  in  business  disaster,  while 
good  management  is  almost  equally  sure  to  result  in  busi- 
ness success. 

Factors  of  Wealth  Production. 

In  the  organization  and  operation  of  every  business  en- 
terprise the  co-operation  of  four  separate  and  different 
kinds  of  economic  elements,  commonly  called  the  factors 


8  MAURICE  H.  ROBINSON 

of  production,  are  necessary.  These  four  factors  are  (1) 
land,  (2)  capital,  (3)  labor  and  (4)  enterprise.  The  first 
two  are  non-human  and  ordinarily  are  unable  to  produce 
articles  of  wealth  except  with  the  aid  of  and  under  the 
direction  of  business  enterprise.  The  second  two  consti- 
tute the  human  element,  but  are  separated  into  two  classes, 
the  former  supplying  the  labor  force,  and  the  latter  direct- 
ing the  conduct  of  business  enterprise.  As  each  of  these 
factors  is  necessary  in  business  activit}'',  it  is  desirable  to 
explain  the  nature  of  each  and  the  special  function  it  per- 
forms in  business  affairs. 

1.  Land  includes  not  merely  the  surface  of  the  earth, 
together  with  the  oceans,  lakes  and  rivers,  but  all  the  ma- 
terials below  the  surface  of  the  land  and  under  the  seas. 
It  also  includes  the  forces  of  nature,  the  work  of  rivers, 
wind  and  tides,  the  effect  of  climatic  conditions,  rainfall, 
heat  and  cold,  winds  and  storms— in  fact,  all  of  the  things 
which  nature  has  furnished  for  mankind  to  work  with. 

The  elements  furnished  by  nature  are  in  a  way  inde- 
structible ;  however,  in  the  work  of  producing  wealth,  while 
the  elements  are  not  destroyed,  they  are  changed  in  form 
in  such  a  way  that  in  many  cases  they  do  not  become  usable 
a  second  time.  Consequently  such  resources,  in  the  process 
of  wealth  production,  become  more  or  less  rapidly  ex- 
hausted, and  in  order  to  secure  the  greatest  possible  bene- 
fits it  is  necessary  to  conserve  such  resources  with  the  great- 
est possible  care.  Moreover  it  is  also  desirable  to  use  the 
land  and  the  natural  resources  for  the  purposes  for  which 
they  are  best  adapted.  It  would  be  undesirable,  for  in- 
stance, to  use  land  adapted  to  the  cultivation  of  corn  for  the 
production  of  fruits,  or  land  peculiarly  fitted  for  manu- 
facturing purposes  for  residences  and  recreation  grounds. 
Again,  certain  kinds  of  manufacturing  require  special 
climatic  conditions.  For  example,  the  manufacture  of  cot- 
ton goods  needs  a  moist  climate  while  the  manufacture  of 
flour  is  more  economically  conducted  in  a  dry  climate.    The 


MODERN  BUSINESS  ORGANIZATION  9 

adaptal)ility  of  the  land  and  the  climatic  conditions  to  par- 
ticular kinds  of  manufacturing^  of  farming,  or  of  (Mun- 
merce,  then,  plays  an  important  i)art  in  connection  with 
the  production  of  wealth.  Further,  in  the  niaiiiifacture  of 
goods,  power  in  some  form  is  generally  found  necessaiy; 
hence,  in  the  early  i)art  of  the  last  century,  the  location  of 
business  establisliments  on  rivers,  at  j^oiuts  where  water 
power  could  be  utilized,  and  in  more  recent  times,  the  loca- 
tion of  iron  and  steel  business  at  points  in  close  proximity 
to  deposits  of  coal  and  natural  gas. 

The  land  thus  furnishes  not  only  the  materials  with 
which  man  works,  but  also  determines  the  locations  for  the 
site  of  manufacturing  and  commercial  establishments  in 
which  the  affairs  of  the  business  are  carried  on;  the  land 
also  furnishes  the  sites  upon  which  the  houses  are  built  in 
which  the  managers  and  lal)orers  live.  It  has  been  found 
that  conditions  of  temperature  also  are  important  elements 
in  connection  with  the  production  of  wealth.  The  temper- 
ate climate  seems  to  be  best  adapted  to  the  development  of 
energy  and  enterprise;  consequently  those  countries  situ- 
ated within  the  temperate  climatr^  have  generally  developed 
more  rapidly  and  have  been  able  to  use  the  resources  of 
nature  with  greater  efficiency. 

2.  A  second  element  in  production  is  man  himself.  It 
is  man's  labor  and  man's  productive  genius  that  has  made 
use  of  the  materials  furnished  by  nature  and  converted 
them  into  the  utilities  which  satisfy  his  wants.  Men  dif- 
fer, however,  both  in  their  ability  to  deal  with  the  materials 
furnished  by  nature  and  in  the  use  which  they  are  able  to 
make  of  such  materials  when  converted  into  suitable  form 
for  human  use.  The  labor  power  of  any  community  varies 
in  accordance  with  the  knowledge  of  the  individual  men, 
and  with  the  ability  of  the  individual  men  in  their  associ- 
ated capacity  to  make  use  of  the  gifts  of  nature.  The 
primitive  races  are  generally  the  subjects  of  nature  and  of 
natural  forces.    As  a  result  of  the  growing  intelligence  of 


10  MAURICE  H.  ROBINSON 

mankind  in  relation  to  business  enterprise,  greater  and 
greater  control  over  nature  and  natural  forces  is  attained. 
The  progress  of  civilization  from  the  economic  standpoint 
has  been  aptly  described  as  a  process  by  which  man  has 
been  transformed  from  the  servant  of  nature  to  the  master 
of  nature.  This  result  is  attained  partly  through  his  ability 
to  create  wealth  faster  than  he  consumes  it,  thus  enabling 
him  to  use  the  portion  that  he  has  saved  to  assist  him  in  the 
creation  of  additional  wealth.  Natural  resources  thus 
transformed  and  stored  by  man  is  called  capital. 

3.  The  formation  of  capital  is  thus  one  of  the  funda- 
mental conditions  of  economic  progress.  In  the  first  stages 
this  resulted  in  the  formation  of  tools  and  weapons  of  de- 
fense. The  tools  were  used  to  assist  man  in  the  subjugation 
of  nature  and  the  weapons  were  used  to  protect  himself 
against  the  constant  warfare  to  which  he  was  subjected  by 
hostile  races  and  the  dangerous  animals  and  reptiles.  The 
tools  gi^adually  assumed  more  and  more  usable  forms  and 
with  every  stage  in  the  evolution  of  tools,  man  became  bet- 
ter able  to  create  and  save  additional  capital  to  assist  his 
efforts  in  providing  for  his  increasing  wants  and  adding  to 
his  stock  of  capital.  He  was  thus  enabled  to  provide  him- 
self with  shelter  and  with  clothing,  and  consequently  he  be- 
came better  able  to  withstand  the  hardships  of  unfavorable 
climatic  conditions  and  to  migrate  from  the  more  temper- 
ate climates  to  those  where  formerly  he  was  unable  to  live 
at  all. 

With  the  creation  of  a  stock  of  capital,  there  came  to  be 
a  marked  difference  between  those  races  which  were  able 
to  make  use  of  capital  in  connection  with  the  natural  re- 
sources and  those  less  efficient  in  this  respect.  Those  who 
were  able  to  make  the  best  use  of  such  facilities  became  mas- 
ters over  the  others  in  the  various  tribal  warfares  that 
occurred,  and  the  general  qualities  that  had  enabled  such 
races  to  make  and  save  capital  also  enabled  them  to  pre- 
serve their  supremacy  by  making  use  of  the  conquered 


MODERN  BUSINESS  ORGANIZATION  11 

races  for  various  purposes  connected  with  tlieir  economic 

life. 

4.  It  is  the  function  of  the  enterpriser,  or  business 
manager,  to  direct  capital,  labor  and  the  natural  resources, 
into  their  proper  channels;  to  unite  the  three  in  proper 
proportions  to  secure  the  greatest  economic  results;  and  un- 
der certain  methods  of  business  organization,  to  assume  the 
risks  connected  with  the  conduct  of  business  establishments 
and  to  take  the  profits  that  arise  as  the  result  of  such  opera- 
tions. 

Business  Units. 

A  combination  of  land,  labor  and  capital,  organized  into 
a  working  union,  under  the  direction  of  a  man  or  a  group 
of  men,  for  the  purpose  of  creating  utilities,  that  is,  to  add 
to  the  store  of  useful  things,  constitutes  a  business  unit. 
Business  units  differ  in  size,  in  complexity,  m  permanence, 
and  in  the  character  of  the  work  which  they  undertake.  For 
example,  the  shoemaker's  shop  is  a  business  unit;  it  occu- 
pies and  uses  a  portion  of  the  land,  one  or  more  laborers 
are  more  or  less  regularly  at  work,  and  it  uses  capital  in  the 
form  of  a  building,  tools,  lasts,  leather  and  shoemaker's 
findings.  Finally,  one  or  more  men,  usually  one,  directs 
the  activities  of  the  establishment  for  the  purpose  of  mak- 
ing and  repairing  boots  and  shoes.  The  grocery  store  is  a 
second  example  of  a  business  unit  of  a  somewhat  more 
elaborate  tyve.  The  grocery  store  uses  land,  capital  and 
labor  and  requires  management.  The  capital  assumes  a 
somewhat  different  form  from  that  found  in  the  shoe  shop, 
but  it  is  still  capital.  It  is  made  up  of  a  stock  of  groceries, 
continually  changing  in  kind  and  quantity,  a  store  building, 
fixtures,  horses  and  delivery  wagons.  A  grocery  store  usu- 
ally requires  the  work  of  more  laborers  than  a  shoe  shop 
and  labor  of  a  different  kind.  Some  labor,  however,  is 
indispensable  in  either  case.  Furthermore,  the  gi'ocery 
store,  like  the  shoe  shop,  needs  intelligent  management. 


12  MAURICE  H.  ROBINSON 

This  management  may  be  in  the  hands  of  one  man,  or  under 
two  or  more  men  Avorking  together  as  one.  Without  such 
management  the  stock  of  goods  will  grow  stale,  the  capital 
will  be  destroyed,  and  the  labor  will  be  misdirected. 

The  United  States  Steel  Corporation  is  a  third  example 
of  a  business  unit  of  an  exceedingly  complex  character. 
Unlike  the  shoe  shop  and  the  grocery  store,  the  Steel  Cor- 
poration is  itself  made  up  of  subordinate  or  constituent 
parts  which,  from  their  character,  we  may  call  operating 
units.  These  operating  units  are  united  into  a  single  busi- 
ness unit  by  means  of  the  holding-corporation  method  of 
uniting  economic  interests  that  will  be  more  fully  described 
in  a  later  section.  These  operating  units  are  each  composed 
of  land,  capital  and  labor.  In  this  respect  they  are  identi- 
cal with  the  small  business  units  already  described.  In 
one  important  characteristic  they  differ,  however,  and  that 
is  in  respect  to  the  management.  The  operating  units  of 
which  the  Steel  Corporation  is  composed  are  each  controlled 
and  directed  from  the  central  office.  That  is,  they  are  not 
self-directing,  but  subject  to  the  orders  of  general  admin- 
istrative officers  of  the  Steel  Corporation.  Unity  of  man- 
agement is,  then,  a  peculiar  characteristic  of  a  business 
unit. 

Thus  a  business  unit  may  be  identical  with  an  operating 
unit,  or  composed  of  several  such  organizations.  More- 
over, when  business  units  are  made  up  of  several  formerly 
independent  business  units,  the  union  may  be  either  partial 
or  complete,  temporary  or  permanent.  When  the  control 
is  divided  between  the  subordinate  units  and  the  central  or- 
ganization, the  union  is  a  partial  one ;  the  rights  of  the  cen- 
tral management  are  limited  by  the  terms  of  the  union,  and 
in  all  other  respects  the  formerly  independent  business 
unit  is  free  to  act  for  itself.  This  form  of  business  organi- 
zation may  be  likened  to  the  federal  union  of  governments 
similar  to  that  of  the  United  States  and  the  several  states 
of  which  the  central  government  is  composed.    The  several 


MODERN  BUSINESS  ORGANIZATION  13 

subordinate  operating  business  units  are  in  tbe  ])r()eess  of 
becoming  completely  merged  with  the  central  organization, 
and  if  the  process  is  carried  to  its  logical  conclusion,  tlu^ 
organization,  from  a  business  point  of  view,  will  in  \\\o. 
course  of  time  be  completely  unified.  Where  the  control  is 
entirely  in  the  hands  of  a  single  management,  the  union  is  a 
complete  one.  In  this  case  the  operating  units  have  no 
rights  of  their  owti,  but  are  strictly  subject  to  orders  from 
the  central  administrative  offices.  Such  a  business  organi- 
zation may  be  compared  with  a  completely  unified  central 
government  where  the  legal  political  organizations,  such  as 
the  cities,  counties  and  townships,  have  no  rights  of  their 
o^^^3,  but  are  entirely  subject  to  the  control  of  the  state 
legislature  and  the  state  administration. 

Where  a  business  unit  is  made  up  of  operating  units, 
the  union  may  be  formed  for  a  period  of  years,  or  may  be  a 
pei-manent  organization.  In  cases  where  the  union  is  not 
complete  it  is  quite  usual  for  a  temporary  union  to  be 
formed.  Such  unions  are  illustrated  by  the  combinations 
which  were  very  common  in  the  United  States  during  the 
seventies  and  early  eighties,  and  have  been  for  the  last 
quarter  of  a  centuiy  a  characteristic  feature  of  German  in- 
dustrial organization.  Where  the  imion  is  at  all  com- 
plete, the  organization  is  more  likely  to  become  a  per- 
manent one.  The  advantages  of  complete  and  perma- 
nent organizations  are  so  great  that  the  tendency  is 
strongly  towards  this  type  of  business  organization. 
A  good  illustration  of  this  type  is  the  American 
Sugar  Kefining  Company  as  organized  in  1894  after  the 
dissolution  of  the  first  sugar  trust.  It  is  better  illustrated 
by  the  International  Harvester  Company,  which  is  made  u]i 
of  a  number  of  foiTnerly  independent  factories,  all  of  which 
are  now  completely  unified  from  the  standpoint  of  business 
organization  and  business  management  into  one  great  com- 
pany. 


14  MAURICE  H.  ROBINSON 

Methods  of  Conducting  Business. 

Considered  from  the  standpoint  of  economic  reward, 
there  are  two  imj)ortant  methods  of  conducting  business 
enterprises.  The  first  class  comprises  those  groups  in  which 
all  the  individuals  interested  in  the  business  enterprise 
share  in  the  income ;  the  second  class  consists  of  those  groups 
where  a  selected  few  control  the  operations:  they  pay  a 
stipulated  amount  for  the  use  of  the  land,  capital  and  labor 
employed,  they  assume  all  or  the  major  portion  of  the  risk 
of  failure,  and  receive  correspondingly  all  or  a  major  por- 
tion of  the  profits  arising  from  the  operations. 

The  most  comprehensive  type  of  organization  of  the 
first  class  is  the  communistic  society.  Under  this  form  of 
organization  there  is  only  a  single  business  unit  for  the 
whole  economic  society.  In  its  ideal  form  this  society  is 
identical  in  its  organization  and  scope  of  activity  with  the 
political  organization  known  as  a  state.  Under  present  con- 
ditions, however,  the  communistic  societies  existing  today 
are  small  organizations  forming  one  of  the  many  business 
units  of  which  the  state  is  composed.  Communism  differs 
from  other  types  of  economic  society  in  two  important  re- 
spects :  First,  not  only  the  land  and  the  capital  belong  to  the 
entire  community,  but  all  goods  ready  for  consumption  are 
held  in  the  name  of  the  community  and  distributed  to  the 
various  members  on  a  substantially  equal  basis,  by  the 
central  management.  The  work  of  production,  moreover, 
is  directly  under  the  control  of  the  same  all-powerful  board 
of  directors,  subject  only  to  the  duly  enacted  constitution 
and  the  by-laws  of  the  society.  The  directors  are  elected  by 
popular  vote  at  stated  intervals,  and  possess  during  their 
term  of  office  the  entire  political  power  as  well  as  the  right 
of  business  management.  To  this  board  belongs  the  task  of 
assigning  to  each  member  of  the  organization  his  work,  and 
of  supervising  its  execution.  The  communistic  society, 
therefore,  must  be  completely  and  harmoniously  organized, 


MODERN  BUSINESS  ORGANIZATION  15 

as  well  as  skilfully  managed,  or  the  individual  members  will 
fail  to  perform  the  various  tasks  efdciently  and  the  society 
will  fail  for  w^ant  of  the  necessaries  of  life.  Owing  partly 
to  the  natural  seltishness  of  mankind,  and  partly  to  the 
difficulty  of  organizing  and  managing  societies  of  so  com- 
plex a  character,  few  connnunistic  organizations  have, 
achieved  success.  Unless  held  together  by  some  dominant 
religious  motive,  they  usually  have  experienced  a  stormy 
existence  and  a  short  life. 

A  more  promising  form  of  social  organization  is  known 
as  socialism  or  the  socialistic  society.  Socialists  differ  from 
conummists  in  several  important  respects.  AMiile  the  com- 
munists make  all  property  common,  the  socialists  not  only 
permit  but  encourage  individual  ownership  of  goods  ready 
for  consumption.  To  use  the  words  of  Professor  Ely  (Out- 
lines of  Economics,  page  515)  :  "Socialists  seek  the  estab- 
lishment of  industrial  democracy  through  the  instrumen- 
tality of  the  state.  Our  political  organization  is  to  become 
also  an  economic  industrial  organization.  Socialism  con- 
templates an  expansion  of  the  business  functions  of  the 
Government  until  the  more  important  businesses  are  ab- 
sorbed. Private  property  in  profit-producing  capital  and 
rent-producing  land  is  to  be  abolished.  Socialists  make  no 
war  upon  capital ;  what  they  object  to  is  the  private  capital- 
ist. They  desire  to  socialize  capital  and  to  abolish  capital- 
ists as  a  distinct  class.  Their  ideal,  then,  is  not,  as  is  sup- 
posed by  the  uninformed,  an  equal  division  of  existing 
wealth,  but  a  change  in  the  fundamental  conditions  govern- 
ing the  acquisition  of  incomes."  Socialistic  organization, 
then,  expands  the  economic  functions  of  the  state  so  far  as 
seems  necessary  in  order  to  abolish  private  property  in  land 
and  the  tools  of  production.  In  all  other  cases  the  individ- 
ual, or  groups  of  individuals,  voluntarily  engage  in  the 
usual  economic  activities.  The  socialistic  organization, 
then,  is  coincident  with  that  of  the  state  so  far  as  its  func- 
tions extend.    Like  the  communistic  organization,  it  must 


16  MAURICE  H.  ROBINSON 

be  well  organized  and  well  managed  or  disaster  and  failure 
inevitably  follow. 

Side  by  side  with  the  socialistic  organization  and  mthin 
the  political  organization,  there  exist  voluntary  organiza- 
tions of  individuals  for  the  purpose  of  undertaking  eco- 
nomic functions  not  under  the  control  of  the  socialistic 
state.  Such  voluntary  organizations  work  for  themselves 
exactly  as  most  men  work  under  present  conditions.  There 
is  thus  competition  existing  between  the  socialistic  state 
carrying  on  the  work  of  production,  and  the  voluntary  or- 
ganizations of  individuals  undertaking  all  other  economic 
activities.  Unless  the  socialistic  state  is  able  to  work  with  as 
great  efficiency  as  those  engaged  in  private  enterprise,  so- 
cialism proves  a  failure  and  is  likely  to  be  abandoned  even 
by  its  own  adherents.  Like  communism,  the  economic  suc- 
cess of  the  socialistic  state  depends  more  largely  upon  or- 
ganization and  administration  and  less  upon  the  individual 
ability  than  the  present  methods  of  conducting  business 
affairs. 

A  less  pronounced  tjipe  of  social  organization,  and  one 
that  is  under  present  conditions  considered  even  more  prac- 
tical, is  the  co-operative  societ}^  Such  organizations  depend 
upon  the  voluntary  co-operation  of  the  ]3arties,  and  there- 
fore must  be  successful  from  the  economic  point  of  view  in 
order  to  be  permanent.  Like  the  communistic  and  socialis- 
tic societies,  co-operative  organizations  are  managed  by  an 
elected  board.  They  maintain,  for  purposes  of  operation, 
an  administrative  organization  similar  to  that  which  exists 
in  the  ordinary  business  enterprise.  The  important  char- 
acteristic of  this  form,  and  one  that  distinguishes  it  from 
the  usual  type  of  business  organization,  is  this :  The  serv- 
ices of  land,  capital  and  the  managers  are  paid  for  out  of  the 
gross  income  of  the  organization,  and  the  laborers  share  the 
remaining  profit  in  accordance  with  the  plan  arranged  by 
the  constitution  of  the  society.  The  co-operative  enterprise 
succeeds,  therefore,  provided  the  board  of  directors  are 


MODERN  BUSINESS  ORGANIZATION  17 

siiffi('i<'ntly  far-sio-htcd  to  oin])loy  able  adiiiinisti-ators;  and 
furthermore  provided  tlie  laborers,  being  in  ultimate  con- 
trol, submit  to  discipline  and  work  as  efficiently  mider  their 
owu  organization  as  they  do  under  a  capitalistic  organiza- 
tion at  the  regidar  wage  scale.  Co-operative  societies  are 
formed  to  engage  in  production  and  to  assist  their  members 
in  purchasing  goods  and  services  for  their  individual  con- 
sumption. The  first  class  has  had  very  little  success,  al- 
though there  are  a  few  notable  exceptions,  for  example, 
the  Coopers'  Co-Operative  Societies  of  ^Minneapolis.  As  a 
rule,  co-operation  in  production  has  been  successful  only 
when  the  work  is  simple  in  character  and  where  the  goods 
manufactured  are  easily  sold.  Co-operation  as  an  aid  in 
purchasing  goods  and  services  has  been  much  more  success- 
ful from  the  economic  standpoint,  and  therefore  such  organ- 
izations exist  in  considerable  numbers  in  many  different 
countries.  This  results  partly  from  the  fact  that  the  profits 
can  be  more  fairly  distributed,  partly  because  the  risks  are 
less,  and  partly  because  the  problems  of  management  are 
less  difficult  to  solve.  Co-operation  of  this  kind  has  been 
peculiarly  successful  in  providing  life  insurance. 

The  several  classes  of  business  enterprise  described 
above  stand  in  marked  contrast  with  the  second  type  of 
business  organizations.  Under  the  influence  of  a  competi- 
tion, a  managerial  class,  technically  known  as  entrepre- 
neui's,  has  been  developed,  whose  special  function  it  is  to 
organize  and  direct  business  imits  and  to  take  the  profits 
arising  from  their  operation.  Under  normal  conditions, 
the  managers  own  a  part  of  the  land  and  capital,  and  employ 
or  contract  for  the  use  of  such  additional  land  and  capital 
as  they  find  it  profitable  to  employ.  They  further  contract 
for  labor  of  the  proper  kind  and  quantity  to  operate  the 
plant.  They  sell  the  entire  product  on  the  open  market,  pay 
all  the  expenses  and  assume  the  risks  in  connection  with 
production  due  either  to  misdirected  effort  or  to  destructive 
forces  of  nature.    On  the  other  hand,  if  the  character  and 

B— II— 3 


18  MAURICE  H.  ROBINSON 

location  of  the  business  is  well  chosen,  and  if  the  business 
is  well  organized  and  ably  managed,  the  profits  arising  from 
such  favorable  conditions  are  the  reward  of  successful  man- 
agement and  belong  to  the  manager. 

Under  somewhat  extreme  conditions  of  individualism 
the  manager  is  a  single  person,  directing  the  establishment 
himself,  assuming  all  the  risks  and  receiving  all  the  profits. 
This  was  the  usual  condition  of  industrial  organization  in 
the  early  stages  of  industrial  development,  when  operations 
were  simple  and  the  capital  required  was  small.    With  the 
invention  of  machinery  and  the  establishment  of  the  factory 
system  on  a  large  scale,  the  character  of  manufacturing  de- 
manded more  capital  and  more  varied  talents  on  the  part 
of  the  manager.    Hence  the  development  of  associations  of 
individuals  for  the  purpose  of  conducting  and  controlling 
business  enterprises  and  the  division  of  labor  within  the 
managerial  group.    For  example,  in  a  partnership  manu- 
facturing business,  one  of  the  partners  may  act  as  treasurer, 
supervising  the  accounts,  while  the  other  partner  has  charge 
of  the  factory  and  the  men  there  employed.    Under  such 
circumstances  it  is  not  difficult  for  the  treasurer  to  cheat 
his  colleague  out  of  a  part  of  his  rightful  earnings.     In 
larger  organizations  the  division  of  labor  and  of  function 
is  found  more  marked.    In  fact  only  a  few  of  the  men  who 
really  undertake  the  risk  of  the  enterprise  have  ordinarily 
any  direct  control  over  the  financial  or  manufacturing  oper- 
ations of  the  company.    They  elect  a  board  of  directors  who 
take  direct  charge  of  the  management,  rendering  an  account 
of  their  work  at  the  annual  meeting.    It  is  of  course  diffi- 
cult, not  to  say  impossible,  for  the  average  stockholder  to 
understand  the  accounts  or  to  determine  from  them  whether 
or  not  the  business  has  been  honestly  and  efficiently  man- 
aged.   Furthermore,  the  directors  in  most  cases  employ  men 
as  superintendents  and  managers,  as  treasurers  and  ac- 
countants, who  may  not  be  members  of  the  company  at  all, 
and  thus  the  direct  economic  relationship  originally  existing 


MODERN  BUSINESS  ORGANIZATION  19 

between  the  manager  and  his  reward  is  partially  and  some- 
times completely  destroyed.  Since  organizations  of  this 
character  are  economically  desirable  to  furnish  capital  to 
undertake  the  operation  of  the  more  important  enterprises, 
all  citizens  are  more  or  less  directly  interested  in  their  hon- 
est and  efficient  administration.  Therefore  the  state,  rep- 
resenting the  common  good,  has  in  recent  years,  by  acts  of 
the  legislature  and  by  judicial  decisions,  regulated  to  a  con- 
siderable extent  the  internal  affairs  of  all  foi-ms  of  volun- 
tary business  associations  w^hich  operate  on  a  large  scale. 

Industrial  Groups. 

Business  organizations  need  to  be  adapted  to  the  nature 
of  the  work  which  they  are  to  undertake.  Work  which  is 
simple  in  its  nature,  requiring  small  plants  and  few  men, 
is  best  conducted  by  a  simple  organization.  Work  of  a 
more  complex  character  demanding  large  plants  and  a  large 
labor  force  needs  complex  organizations.  Since  the  char- 
acter of  the  plant  is  largely  conditioned  by  the  character  of 
the  work  which  is  undertaken,  it  is  desirable  to  classify 
the  various  industries  into  groups,  each  of  which  is  devoted 
to  ojDerations  similar  in  character  and  requiring  similar 
organizations.  From  this  point  of  view  we  may  classify 
industries  into  the  following  groups: 

1.  The  Extractive  Industries.  The  extractive  indus- 
tries include  fanning,  fishing,  lumbering  and  mining.  In 
the  first  three  of  the  industries  the  business  units  are  small 
and  are  generally  best  acbninistered  by  the  individual  pro- 
prietor or  a  partnership.  In  the  case  of  mining,  however, 
the  condition  is  somewhat  different.  Mining  as  carried  on 
at  the  present  time  requires  a  large  investment  of  capital, 
and  elaborate  machinery.  Consequently  the  mining  in- 
dustry generally  demands  a  business  organization  of  a  some- 
what elaborate  order,  and  in  this  respect  differs  widely 
from  the  other  extractive  industries. 


20  MAURICE  H.  ROBINSON 

2.  Manufacturing.  Manufacturing,  as  the  word  signi- 
fies, means  "made  by  hand,"  and  in  earlier  stages  practi- 
cally all  manufactured  goods  were  thus  made.  Manufactur- 
ing was  then  in  what  is  known  as  the  handicraft  stage ;  con- 
sequently we  find  that  it  was  operated  generally  by  small 
and  simple  organizations.  Later  it  became  a  machine  in- 
dustry demanding  a  large  investment  of  capital  in  tools 
and  machinery,  and  the  organization  has  accordingly  been 
adapted  to  the  new  conditions.  Again,  goods  are  made 
either  to  order  or  for  t^e  general  market.  For  example, 
men's  clothing  is  made  either  in  the  small  shop  of  the  cus- 
tom tailor,  permitting  of  a  simple  business  organization,  or 
it  is  made  in  the  large  factory,  catering  to  the  general 
market,  in  which  case  the  organization  becomes  sufficiently 
complex  to  take  care  of  the  varied  activities  of  this  method 
of  manufacture.  In  the  third  place,  manufacturing  plants 
may  undertake  only  one  stage  in  the  process,  or  all  of  the 
stages.  For  example,  a  business  establishment  may  manu- 
facture Bessemer  steel  billets  only,  or  it  may  mine  the  ore, 
convert  the  ore  into  pig  iron,  and  then  into  steel  billets,  then 
into  beams  and  finally  into  bridges.  It  may  even  go  so  far 
as  to  erect  the  bridges  ready  for  traffic.  In  such  cases  the 
organization  should  be  correspondingly  complex  in  order  to 
permit  of  efficient  direction  and  management. 

3.  Commerce.  The  specific  work  of  commerce  consists 
in  transferring  titles  to  various  kinds  of  private  property. 
Usually,  however,  storage  of  goods  connected  with  the  trade 
is  conducted  in  connection  with  the  direct  work  of  com- 
merce. The  work  of  commerce  is  thus  to  take  the  goods 
from  those  who  have  a  surplus  and  transfer  them  to  those 
who  have  a  deficiency.  Commerce  may  be  either  local,  na- 
tional or  international  in  scope.  Commerce  of  a  local  na- 
ture is  ordinarily  simple  in  character  and  needs  only  simple 
business  organization.  National  and  international  com- 
merce are  more  complex  and  require  more  complex  organi- 
zation. 


MODERN  BUSINESS  ORGANIZATION  21 

4.  Transportation.  Commerce  transfers  titles;  trans- 
portation distributes  the  goods.  Transportation  is  con- 
ducted by  a  variety  of  agencies  and  instrumentalities.  In  its 
simplest  form  it  is  conducted  by  pack  animals,  by  wagons 
and  drays  and  by  boats  and  sailing  vessels ;  in  its  more  com- 
plex form,  by  steam  cars,  steam  boats,  by  electric  traction, 
by  pneumatic  tubes,  and  by  pipe  lines  for  the  transportation 
of  oil  and  other  fluid  products.  In  its  modern  development, 
transportation,  as  illustrated  by  the  modern  railway,  is  the 
most  complex  of  all  business  enterprises  and  consequently 
demands  the  most  compi-eheusive  and  highly  developed 
business  organization. 

Political  Conditions  and  Business  Organization. 

The  character  of  the  government  directly  affects  busi- 
ness organization  and  management  in  several  important 
particulars.  In  the  first  place,  some  governments  undertake 
many  kinds  of  business  enterprises,  and  all  governments 
enter  into  business  to  a  limited  extent.  For  example,  prac- 
tically all  governments  collect,  transport  and  deliver  mail. 
Many  governments  operate  telegraph  and  telephone  sys- 
tems, street  cars,  water  works  and  gas  plants,  and  furnish 
electricity  for  lighting  purposes.  A  few  govermnents  fur- 
nish markets  and  undertake  the  business  of  carrying 
freight,  passengers  and  express.  In  some  cases  govern- 
ments prohibit  the  regular  business  organizations  from 
entering  into  the  business  industries  which  they  operate. 
In  other  cases  governments  compete  with  private  organi- 
zations doing  the  same  kind  of  business. 

In  the  second  place,  all  governments  authorize  particu- 
lar forms  of  organization  and  make  specific  regulations  in 
regard  to  their  operation,  and  protect  such  organizations 
as  they  authorize  so  far  as  they  conform  to  the  law.  Thus 
the  partnershij)  and  the  corporation  is  universally  author- 
ized by  every  modem  government.  Furtheraiore,  mer- 
chants' and  manufacturers'  associations,  stock  exchanges. 


22  MAURICE  H.  ROBINSON 

labor  unions,  and  other  organizations  formed  for  the  pur- 
pose of  facilitating  business  activity,  are  permitted  and 
protected  by  law.  In  cases  where  particular  forms  of 
business  organizations  are  definitely  authorized,  the  au- 
thority thus  conferred  is  always  strictly  limited  by  the 
terms  of  the  act.  In  other  cases,  where  business  organiza- 
tions are  voluntarily  formed  but  not  definitely  authorized 
by  a  particular  legislative  act,  the  authority  of  such  organi- 
zations, their  internal  relations,  and  the  scope  of  their 
activities  are  determined  in  each  case  by  the  courts  as  the 
case  seems  to  demand. 

In  the  third  place,  practically  all  modern  governments 
undertake,  through  legislation,  the  courts  and  the  admin- 
istration, to  protect  property  rights  of  all  business  organi- 
zations that  are  legitimately  formed.  In  this  country,  the 
Federal  Government  and  most  of  the  individual  states 
protect  such  property  rights  by  clauses  in  the  fundamental 
constitutions  as  well  as  in  the  statute  law.  Moreover,  cer- 
tain organizations  are  permitted  in  the  interests  of  the 
public  welfare,  to  take  private  property  under  the  right  of 
eminent  domain  for  their  own  use,  paying  the  owners  of 
the  property  proper  compensation,  whenever  in  the  judg- 
ment of  the  courts  such  transfer  of  property  rights  is  in 
the  interests  of  the  public  service. 

In  the  fourth  place,  all  governments  protect  the  con- 
tracts which  are  entered  into  by  business  organizations. 
Whenever  agreements  between  such  organizations  are,  for 
any  reason,  not  enforced  through  some  responsible  gov- 
ernment, they  are  almost  invariably  broken,  whenever  it 
becomes  for  the  individual  interest  of  either  party  to  do  so. 
Whenever  the  agreements  entered  into  by  business  organi- 
zations are  deemed  contrary  to  public  policy,  the  parties  to 
such  agreements  are  subjected  to  either  civil  or  criminal 
penalties,  or  to  both. 

In  the  fifth  place,  most  governments  regard  the  com- 
petitive system  as  fundamental  in  the  present  economic 


MODERN  BUSINESS  ORGANIZATION  23 

life,  and  therefore  attempt  in  many  important  ways  to 
protect  and  perpetuate  it.  Any  organizations,  therefore, 
that  phiinly  and  deliherately  attempt  monopolies  in  an  in- 
dustry, are  ordinarily  subjected  to  punishment,  and  in 
certain  cases  the  governments  take  extreme  measures  and 
order  their  dissolution.  This  policy  results  in  preventing 
the  formation  of  certain  kinds  of  organizations  in  some 
cases,  of  breaking  up  larger  organizations  into  smaller  ones 
in  other  cases,  and  in  still  others  of  entirely  changing  the 
form  of  organization  generally  adopted  for  carrying  on 
business  enterprises.  An  excellent  example  of  this  is  found 
in  the  attitude  of  the  United  States  Government  and  the 
German  Government  to  that  form  of  organization  kno^^^l 
as  the  combination  in  this  country  and  the  cartel  in  Ger- 
many. In  the  United  States,  combinations  have  always 
been  held  void  and  in  most  cases  illegal.  In  Germany,  on 
the  other  hand,  such  organizations  have  been  approved  and 
the  agreements  under  which  they  are  fomied  are  enforce- 
able at  law.  Consequently  our  American  industrial  leaders 
early  abandoned  the  combination  and  adopted  the  trust 
fonn,  and  later  the  corporate  form,  of  organization  in  its 
place,  while  the  Germans  have,  under  substantially  similar 
industrial  conditions,  continued  to  administer  the  common 
relations  of  their  large  business  enterprises  through  the 
cartel  method. 

In  the  sixth  place,  in  some  cases  governments  go  so  far 
as  to  regulate  the  character  of  the  service  which  business 
organizations  fonned  within  their  domains  render  to  their 
customers.  In  some  cases  this  regulation  is  in  the  interest 
of  those  who  purchase  the  goods;  in  others,  of  those  who 
are  engaged  in  the  service.  Examples  of  the  first  method 
are  found  in  the  pure  food  law  recently  enacted  by  the 
United  States  Congress,  and  in  laws  of  a  similar  character 
enacted  in  several  of  the  states,  to  re.gulate  the  quality  of 
gas  and  water  furnished  by  private  organizations.  Exam- 
ples of  the  second  method  are  found  in  the  federal  legisla- 


24  MAURICE  H.  ROBINSON 

tion  requiring  all  interstate  railways  to  equip  their  trains 
with  safety  couplers,  and  in  the  state  laws  requiring  build- 
ings to  be  erected  in  conformity  to  the  building  regula- 
tions made  for  the  purpose  of  preventing  conflagrations. 
In  the  seventh  place,  most  modern  governments  regu- 
late the  price  which  business  organizations  may  charge  for 
certain  kinds  of  industrial  service.  The  most  important 
industry  in  which  this  policy  is  generally  followed  is  that 
of  transportation.  It  is  also  quite  generally  applied 
throughout  the  domain  known  as  the  public  service  field. 
Originally  it  was  thought  that  competition  between  rival 
railway  systems  would  insure  fair  and  stable  railway  rates. 
As  a  result  of  experience,  it  has  been  found  that  railway 
com]3etition  results  in  fluctuating  rates  and  discrimination 
between  places  and  individual  organizations,  and  generally 
in  the  final  consolidation  of  the  competing  lines.  To  rem- 
edy the  evils  growing  out  of  such  conditions,  some  govern- 
ments have  purchased  and  operate  the  entire  railway  sys- 
tems within  their  domains;  others  have  authorized  some 
public  authority,  usually  a  commission,  to  adjust  the  rates 
for  the  purpose  of  securing  fairly  equitable  conditions  be- 
tween competing  railways  and  between  the  railways  and 
those  who  make  use  of  their  services.  The  character  of  the 
policy  of  various  governments  with  respect  to  business  or- 
ganizations thus  plays  an  exceedingly  important  role  at 
the  present  time  and  one  of  growing  importance  as  the 
complexity  of  industrial  conditions  increases. 

Social  and  Industrial  Conditions  Affecting  Business. 

Not  less  important  than  the  political  conditions  are  the 
social  customs  and  moral  ideals  of  the  business  world.  As 
already  noticed,  in  organized  industry  each  individual  re- 
ceives his  own  economic  reward  as  a  result  of  the  division 
of  a  common  fund.  With  simple  organizations  it  is  possi- 
ble for  the  parties  interested  to  take  part  directly  in  the 
division  of  the  spoils.    In  most  cases,  however,  the  share  of 


MODERN  BUSINESS  ORGANIZATION  25 

each  x)articipaut  is  to  a  considerable  extent  dependent  upon 
the  good  faith  of  those  chosen  to  make  the  distribution. 
AVhile  governments  may  punish  those  who  act  fraudu- 
lently and  may  attempt  in  all  possible  ways  to  insure  an 
equitable  allotment  of  the  conmion  store,  still,  generally, 
the  parties  to  a  comprehensive  business  organization  must 
rely  on  the  good  faith  and  common  honesty  of  those  whom 
they  choose  to  manage  the  enterprise.  This  is  the  reason 
why  the  corporation  cannot  flourish  except  in  communities 
where  the  standard  of  business  morals  is  fairly  high  and 
why  profit-sharing  co-operative  organizations  have  usually 
failed.  It  is  true,  of  course,  that  the  introduction  of  ac- 
counting systems  and  the  extension  of  the  police  activity 
of  the  state  may  make  possible  business  organizations  of 
considerable  complexity,  even  where  the  morals  are  low. 
Such  conditions,  however,  add  immensely  to  the  cost  of 
conducting  business  and  to  the  expenses  of  the  Government. 
Ordinarily,  therefore,  the  simpler  types  of  business  organ- 
izations persist  until  the  moral  tone  of  the  business  com- 
munity is  fairly  high. 

Again,  the  development  of  the  higher  types  of  business 
organization  is  for  many  reasons  extremely  slow.  The 
corporation,  for  example,  existed  in  its  principal  features 
among  the  Romans,  two  thousand  years  ago,  but  yet  it  is 
only  within  the  last  twenty-five  years  that  this  foi-m  of 
organization  has  become  a  dominant  factor  in  modern  busi- 
ness enterprise,  and  that  only  in  the  more  progressive  coun- 
tries. In  this  respect  the  city  stands  in  marked  contrast  to 
the  country.  This  is  because  it  is  customary  for  the  city 
dweller  to  associate  in  various  ways  with  his  neighbors. 
On  the  contrary,  the  countryman  is,  ])y  force  of  circum- 
stances, in  the  habit  of  working  and  living  alone.  lie 
undertakes  certain  co-operative  enterprises  in  connection 
with  his  neighbors,  to  be  sure,  but  in  his  ordinary  business 
relations  he  acts  purely  in  his  own  capacity  as  an  individ- 
ual.    For  this  reason  it  is  difficult  to  fonn  corporations 


26  MAURICE  H.  ROBINSON 

for  the  pui3)ose  of  carrying  on,  for  instance,  creameries 
among  the  dairy  farmers,  and  on  this  account  stockbro- 
kers do  not  look  among  the  farmers  for  their  regular 
customers,  although  as  a  matter  of  fact  the  farmers  are 
becoming  an  important  class  of  investors.  With  their  sur- 
plus gains  they  buy  land  and  make  their  investments  where 
they  can  personally  overlook  the  property  which  they  own 
and  directly  superintend  its  management.  Thus  associat- 
ed business  enterprise  has  not  become  a  habit  or  custom 
with  them.  They  are  accustomed  to  associate  for  political 
purposes,  but  not  for  business  enterprise. 

The  development  of  the  co-operative  spirit  necessary  in 
the  modern  business  organization  and  management  is  the 
outgrowth  of  experience  and  is  founded  upon  mutual  confi- 
dence and  reciprocal  good  faith.  Since  the  earliest  times, 
men  have  been  accustomed  to  co-operate  for  the  purpose 
of  undertaking  physical  tasks  beyond  the  strength  of  one 
man.  Thus,  for  example,  in  colonial  days,  and  even  with- 
in the  memory  of  the  present  generation,  substantial  frame 
houses  and  barns  were  erected  at  a  raising  in  which  all  the 
active  young  men  of  the  neighborhood  joined.  Another  fa- 
miliar method  of  co-operating  is  known  as  changing  work, 
characteristic  of  New  England  farm  life  in  earlier  days  and 
still  common  in  every  farming  community.  In  such  cases 
the  relation  existing  between  the  service  rendered  and  the 
compensation  is  easily  calculated  by  the  participants.  With 
the  complete  development  of  the  principle  of  specialization 
of  work,  and  of  the  economic  system  kno\\Ti  as  money  ex- 
change, the  character  of  co-operation  has  almost  entirely 
changed.  Men  co-operate  at  the  present  time  chiefly  in 
furnishing  capital  to  equip  and  operate  factories,  stores 
and  railways.  Capitalists  and  laborers  co-operate,  each 
class  furnishing  the  necessarj^  element  in  the  work  of  pro- 
duction and  each  receiving  his  compensation  out  of  the 
conmion  product.  Under  these  circumstances,  the  relation 
between  the  work  done  and  its  just  reward,  so  obvious  in 


MODERN  BUSINESS  ORGANIZATION  27 

plij^sical  co-operation,  is  always  difiicult  and  sometimes  im- 
l)()ssiblc  to  ascertain.  Consequently  men  hesitate  to  enter 
into  organizations  of  this  character,  preferring  to  work 
alone  and  enjoy  all  the  fruits  of  their  labor  even  though 
such  fruits  may  be  less  abundant.  As  men  become  more 
honest  and  less  seltish,  the  co-operative  spirit  develops.  As 
men  become  more  and  more  proficient  in  their  grasp  of 
economic  principles,  they  are  able  to  understand  the  part 
played  by  each  factor  in  general  production,  and  therefore 
they  are  better  able  to  agree  on  a  division  of  the  product 
into  individual  shares. 

But  to  understand  the  problem  is  not  enough.  Some  ex- 
act method  of  applying  the  principles  must  be  used  to  se- 
cure results.  Such  a  method  is  furnished  by  modern  ac- 
countancy. Accounting  thus  has  a  double  task  to  perform : 
First,  to  secure  responsibility  and  attention  to  duty;  and 
second,  to  determine  the  part  played  in  joint  production 
by  the  several  elements  in  business  organization  and  con- 
sequently the  proper  share  of  each  in  the  common  product. 
Thus  the  co-operative  spirit,  so  necessary  in  the  com- 
plex organizations  of  our  modern  business  life,  awaits  the 
develoi)ment  of  a  higher  standard  of  business  morals  and 
a  more  perfect  understanding  of  economic  principles  and 
the  application  of  such  principles  through  the  science  and 
art  of  accounting. 

That  the  character  of  business  organization  is  profound- 
ly affected  by  industrial  conditions  does  not  need  to  be 
proved.  In  the  handicraft  system  the  organization  was 
bound  to  be  simple ;  in  the  factory  system  the  organization 
becomes  complex  as  the  factory  operations  become  com- 
plex and  intricate.  Thus  the  invention  of  the  spinning 
jenny,  of  the  power  loom,  of  the  steam  engine  and  the  lo- 
comotive, of  the  telegraph  and  telephone,  of  Bessemer  steel 
and  of  re-inforced  concrete,  have  been,  during  the  past  cen- 
tury, dominant  forces  causing  business  organization  to 
become  more  and  more  complex  and  more  and  more  exten- 


28  MAURICE  H.  ROBINSON 

sive.  Moreover,  the  enlargement  of  modern  states  through 
the  absorption  of  small  political  units,  the  extension  of  free 
trade  areas,  the  development  of  cheap  transportation  and 
of  the  world  market,  have  constantly  been  calling  for  a 
higher  organization  of  the  industrial  activities.  Further- 
more, the  amount  of  capital  ready  for  investment  and  the 
freedom  with  which  it  flows  into  the  hands  of  business 
managers,  plays  an  important  part  in  shaping  business  or- 
ganization. The  industrial  and  financial  conditions  for  the 
past  century  have  been  demanding  changes  in  business  or- 
ganization, all  looking  toward  greater  complexity  and 
greater  size.  On  the  other  hand,  the  unfavorable  political 
conditions,  the  low  standard  of  business  morals,  lack  of  a 
knowledge  of  economic  principles,  unscientific  accounting, 
and  a  scarcity  of  men  of  the  proper  caliber  to  undertake 
the  task  of  organization  and  management  for  large  and 
complex  business  undertakings— all  these  factors  have 
prevented  the  normal  development  of  business  organiza- 
tion corresponding  in  character  with  the  technical  develop- 
ment of  the  industrial  world.  Rapid  progress  has  been 
made  in  all  of  these  lines  in  the  past  century,  and  it  may 
be  confidently  expected  that  such  barriers  to  the  proper  de- 
velopment of  business  organization  will  be  of  less  impor- 
tance in  the  future. 

II.  THE  ORGANIZATION  OF  BUSINESS  ENTER- 
PRISES. 

Classes  of  Organizations. 

As  already  stated,  the  function  of  the  enterpriser,  or 
business  manager,  is  to  organize  the  factors  of  production 
into  a  working  union,  direct  their  activities,  assume  the 
risk  of  failure,  and  receive  the  rewards  of  business  suc- 
cess. Under  ordinary  conditions,  in  industrial  soci'ities  as 
at  present  carried  on,  there  are  three  principal  types  of 
business  organizations,  each  having  peculiarities  of  its  own, 


MODERN  BUSINESS  ORGANIZATION  29 

each  being  litted  for  certain  kinds  of  business  oi)erati()ns, 
and  each  having  certain  limitations  which  prevent  its  gen- 
eral adoption.  These  three  kinds  of  business  oi-ganizations 
are  the  individual  proprietorship,  the  partnership,  and  the 
corporation. 

The  Individual  Proprietorship. 

The  individual  proprietorship  has  several  marked  ad- 
vantages which  make  it  a  prominent  type  of  business  or- 
ganization. In  the  first  place,  the  individual  proprietor 
can  ordinarily  undertake  any  kind  of  business  enterprise 
except  those  which  are  assumed  by  the  government  exclu- 
sively, or  are  forbidden  on  grounds  of  public  policy,  or 
require  special  licenses.  Thus  an  individual  business  enter- 
priser cannot,  in  the  United  States,  undertake  the  transpor- 
tation of  the  mail,  or  engage  in  coining  money,  or  at  the 
present  time  engage  in  the  lottery  business.  Nor  can  an 
individual  ordinarily  undertake  the  basiness  of  selling  alco- 
holic beverages  without  a  license  from  some  responsible 
government.  But  outside  of  those  business  activities  which 
are  assumed  by  the  Government,  forbidden  entirely,  or  per- 
mitted by  license  only,  the  individual  proprietor  is  free  to 
enter  into  any  business  enterprise,  conduct  it  as  long  as  he 
pleases,  and  retire  from  it  whenever  he  has  completed  all 
the  contracts  which  he  has  entered  into.  The  ability  of  the 
individual  proprietor  to  enter  into  business  undertakings 
without  any  formality,  and  retire  in  the  same  way,  is  an 
important  factor  in  promoting  business  enterprise  and  in 
keeping  the  several  lines  of  business  activity  evenly  de- 
veloi)ed. 

In  the  second  place,  the  individual  proprietor,  having 
no  one  else  to  consult,  can  act  in  all  emergencies  with  great- 
er promptness  than  the  more  complex  forms  of  organiza- 
tion. He  may  thus  take  advantage  of  business  opportuni- 
ties that  are  impossible  in  the  case  of  partnerships  or  cor- 
porations.   'For  the  same  reason  he  may  also  avoid  certain 


30  MAURICE  H.  ROBINSON 

dangers  that  ordinarily  surround,  and  sometimes  destroy, 
business  enterprises.  Of  course  tlie  ability  to  act  promptly 
is  not  an  unmixed  business  blessing.  It  is  often  the 
case  that  hasty  action  is  the  direct  cause  of  business 
failure.  Where  deliberation  and  the  combined  judg- 
ment of  several  men  are  desirable,  the  individual 
proprietorship  has  marked  disadvantages.  The  individ- 
ual proprietor,  then,  having  the  power  to  act  on  his 
own  responsibility,  must  needs  be  a  man  of  sound 
business  judgment  and  discretion  in  order  to  main- 
tain his  business  existence  side  by  side  with  organiza- 
tions which  are  able  to  use  the  business  ability  of  several 
men  in  determining  questions  of  business  policy.  As  busi- 
ness conditions  become  more  stable  and  the  law  of  busi- 
ness success  becomes  better  known,  the  advantages  of  thy 
individual  proprietor  grow  less  and  less. 

In  the  third  place,  the  individual  proprietor  can  keep 
his  own  affairs  to  himself  and,  while  the  element  of  secrecy 
is  of  less  and  less  importance  as  business  management  be- 
comes more  of  a  science  and  less  of  an  art,  still  the  more 
competitors  know  of  one's  business  plans  and  processes,  the 
less  the  chances  of  ultimate  success.  This  is  the  inevitable 
result  of  two  conditions,  both  of  which  seem  to  be  permanent 
factors  in  our  present-day  economic  system.  They  are  (1) 
competition  and  (2)  ignorance. 

Competition  is  the  economic  struggle  of  similar  business 
units  for  supremacy;  hence  strategy,  maneuvering,  and 
sometimes  deceit,  play  an  important  part  in  business  suc- 
cess. Consequently  details  of  plans  must  be  kept  from  com- 
petitors, and  this  is  always  difficult  and  sometimes  impos- 
sible where  many  men  are  interested  in  the  business  man- 
agement. Second,  it  is  only  by  keeping  one's  business  en- 
emies in  ignorance  of  one's  plans,  methods  and  processes, 
that  one  is  able  to  keep  whatever  advantage  comes  from  ex- 
clusive knowledge.  As  secret  processes  become  known  to 
the  trade,  and  as  business  success  becomes  more  and  more 


MODERN  BUSINESS  ORGANIZATION  31 

dependent  upon  efficiency  in  production,  the  advantages 
ui"  the  individual  proprietor  in  this  respect  become  of  less 
importance. 

In  the  fourth  place,  since  every  business  enterprise  has 
its  own  i^cculiar  risks  and  those  who  undertake  the  organi- 
zation and  management  reap  the  profits  from  their  exclusive 
operation,  it  follows  that  the  same  parties  ought  to  suffer 
the  natural  penalties  that  result  from  unsuccessful  manage- 
ment. In  the  individual  proprietorship  this  is  ordinarily 
the  case.  Those  who  manage  business  enterprises  well,  jDros- 
per ;  those  who  do  not,  soon  fail  and  take  their  proper  places 
as  superintendents  and  laborers.  The  law  of  survival  of 
the  fittest  thus  is  applied  with  almost  relentless  certainty 
to  business  enterprises  operated  under  the  control  of  the 
individual  proprietor,  and  rapid  progress  in  the  science  and 
art  of  business  management  is  a  necessary  result. 

There  are,  however,  several  particulars  in  w^hich  the  in- 
dividual proprietor  fails  to  provide  successful  business  or- 
ganization for  particular  kinds  of  businesses.  The  more 
important  of  these  disadvantages  may  be  enumerated  and 
placed  in  contrast  with  the  strong  points  of  this  type  of 
organization.  In  the  first  place,  owing  to  the  demand  for 
large  organizations  in  certain  industrial  groups,  the  capi- 
tal at  the  connnand  of  any  one  individual  is  often  insuf- 
ficient for  the  construction  and  operation  of  a  plant  of  the 
greatest  economy ;  hence  individuals  combine  their  capital. 
In  the  second  place,  large  enterprises  often  require  busi- 
ness judgment,  skill  and  ability  beyond  the  capacity  of 
any  one  man  to  furnish;  hence  several  men  enter  into  a 
combination  to  conduct  jointly  a  business  entei*prise  in  or- 
der that  they  may  secure  the  benefits  of  their  co-operative 
wisdom.  In  the  third  place,  in  accordance  with  the  teach- 
ings of  the  modern  theory  of  risk,  business  men  hesitate  to 
put  all  their  eggs  in  one  basket  and  undertake  the  risks  that 
follow  from  such  a  policy.  Moreover,  the  individual  can- 
not avoid  the  risks  by  organizing  and  managing  many  small 


32  MAURICE  H.  ROBINSON 

enterprises,  for  in  the  first  place  any  one  of  such  enter- 
prises is  liable  for  the  losses  suffered  by  any  other  of  the 
business  enterprises.  In  the  second  place,  this  scattering 
of  the  capital  within  the  control  of  any  one  individual  pre- 
vents him  from  securing  the  economies  of  a  large  scale  of 
production. 

For  these  reasons  the  individual  proprietorship  is  adapt- 
ed to  the  following  classes  of  industrial  enterprises  only: 
Those  where  the  capital  required  for  efficient  production  is 
small;  those  where  the  risks  of  conducting  the  enterprise 
are  relatively  slight ;  those  where  the  operations  are  simple 
in  character  and  well  understood  by  the  average  business 
man.  Consequently  organizations  in  which  the  skill  and 
capital  of  a  number  of  individuals  are  united  have  largeh 
superseded  the  individual  proprietor  in  all  the  industries 
which  require  large-scale  production  to  secure  the  great- 
est efficiency. 

The  Partnership. 

The  simplest  form  of  organization  by  which  the  skill 
and  capital  of  two  or  more  men  may  be  combined  for  the 
purpose  of  undertaking  the  management  of  business  enter- 
prises is  the  partnership.  The  partnership  may  be  defined 
as  ''the  result  of  a  contract  between  two  or  more  competent 
parties  to  combine  their  mone}^,  property,  skill  or  labor  for 
the  prosecution  of  some  lawful  business  for  profit."  A 
partnership,  then,  may  be  formed  by  the  mutual  agreement 
of  any  gi'oup  of  men  for  any  lawful  object.  Each  of  the 
partners  ordinarily  has  equal  rights  with  all  the  others  in 
the  management  of  the  business.  By  agreement,  however, 
the  rights  of  special  partners  may  be  limited,  as  in  the  case 
of  a  dormant  or  special  partner.  The  partnership,  as  a  re- 
sult of  its  natural  characteristics,  has  the  following  essen- 
tial features:  (1)  Each  partner  is  agent  for  the  others  for 
the  purpose  of  conducting  the  business  for  which  the  part- 
nership was  formed;  consequently  any  contract  properly 


MODERN  BUSINESS  ORGANIZATION  33 

connected  with  the  business  and  entered  into  by  any  one  of 
the  firm,  is  binding  on  the  partnership.  The  management 
is  thus  in  the  control  of  the  several  members  of  the  part- 
nership, acting  both  jointly  and  severally.  Since  each  of 
the  members  has  equal  rights  with  all  the  others,  it  is  im- 
possible to  conduct  a  partnership  business  through  the  agen- 
cy of  a  selected  board  of  directors. 

(2)  The  partnership  is  terminated  by  the  death  or  re- 
tirement of  any  one  of  the  partners,  and  hence  is  always  an 
organization  of  limited  duration.  It  is  a  personal  relation- 
ship, and  hence  a  partner  cannot  sell  his  interest  to  a  third 
jDarty  except  with  the  consent  of  all  the  other  partners,  in 
which  case  a  new  partnership  is  formed,  although  it  may 
retain  the  old  name. 

(3)  The  partnership  is  not  recognized  in  legal  theory 
as  a  business  unit;  hence  in  case  of  business  troubles, 
suits  are  brought  against  one  or  more  of  the  individual 
members  of  the  firm,  and  not  against  the  firai  itself.  ^Eore- 
over,  all  the  personal  property  of  any  one  of  the  members 
of  a  partnership  may  be  attached  and,  on  judgment  by  a 
court  of  competent  jurisdiction,  sold  to  pay  the  debts  of  the 
partnership.  Further,  in  case  of  insolvency,  each  partner 
is  personally  liable  for  all  the  partnership  debts. 

Partnerships  are  classified  with  respect  to  the  scope  of 
their  business  operations  into  general  and  special.  A  gen- 
eral partnership  is  one  organized  for  the  operation  of  some 
general  line  of  business,  while  a  special  partnership  is  one 
formed  to  undertake  some  definite  task  or  some  particular 
line  of  business.  ^lost  connnercial  and  professional  part- 
nerships are  of  the  former  type,  w^hile  partnerships  fomied 
to  purchase  and  subdivide  a  piece  of  real  estate,  to  finance 
and  sell  patentrights,  or  to  promote  and  undei'write  a  cor- 
poration, are  examples  of  the  latter. 

Partnerships  are  again  classified  with  respect  to  the  lia- 
bility of  the  partners  into  ordinary  and  limited.  In  the 
former,  all  the  partners  are  subject  to  the  ordinary  condi- 

B — n— 3 


34  MAURICE  H.  ROBINSON 

tioDS  as  specified  above.  In  the  latter  type,  wliicli  may  be 
formed  only  under  the  direct  authority  of  statute  law,  some 
of  the  partners  are  silent  and  inactive,  and  their  liability 
is  limited  by  the  amount  of  their  investments.  Such  part- 
ners take  no  part  in  the  management  of  the  business. 

In  addition  to  the  several  forms  described  above,  cer- 
tain forms  of  business  organization  have  been  created  by 
statute,  or  recognized  by  the  courts,  which  partake  of  the 
character  of  partnerships  on  the  one  hand  and  of  the  cor- 
poration on  the  other.  The  more  important  of  these  are 
mining  partnerships,  and  the  ordinary  joint  stock  company. 
Both  of  these  organizations  operate  under  the  principle 
of  unlimited  liability,  while  each  member  may  transfer  his 
interests  and  the  members  acting  together  may  select 
a  manager,  or  board  of  managers,  to  conduct  the  business 
affairs  for  the  firm.  In  the  case  of  mining  partnerships 
such  authority  is  strictly  limited  to  the  necessary  business 
of  the  partnership. 

The  general  ]3artnership  seems  to  have  developed  from 
the  special  partnership  in  relatively  recent  times.  In  the 
early  stages  of  the  world's  industrial  organization  the  in- 
dividual proprietor  was  the  characteristic  if  not  the  ex- 
clusive agency  through  which  business  enterprises  were 
conducted.  During  the  early  Middle  Ages  commerce  by  sea 
was  in  a  rapid  stage  of  development  and  many  varieties  of 
the  special  partnership  were  de\dsed  and  extensively  used 
for  the  purpose  of  sharing  the  risks  of  commercial  under- 
takings in  foreign  lands  and  on  the  high  seas.  With  the 
advent  of  the  modern  economic  system,  late  in  the  sixteenth 
century,  the  partnership  relation  was  extensively  adopted 
for  the  conduct  of  commercial  and  manufacturing  orga- 
nizations at  home,  and,  since  such  organizations  were  ex- 
pected to  be  relatively  permanent,  the  general  partner- 
ship became  the  dominant  type  and  the  special  partnership 
was  reserved  for  more  temporary  undertakings. 


MODERN  BUSINESS  ORGANIZATION  35 

The  Articles  of  Copartnership. 

The  partnership  relations  are  determined  at  the  outset 
and  regulated  during  tlie  life  of  the  organization  b}'  an 
agreement  between  the  partners.  Wliile  partnerships  may 
be  formed  by  oral  agreement,  they  are  ordinarily  stated 
in  writing,  and  in  such  ease  the  statement  containing  the 
contract  is  called  the  articles  of  copartnership.  After  the 
articles  of  copartnership  are  once  drawn  u]),  they  can 
be  changed  only  by  the  unanimous  consent  of  all  the  mem- 
bers. Hence  they  are  of  the  utmost  imi^ortance,  and  should 
be  formulated  with  the  greatest  care.  Tlie  articles  of  co- 
partnership differ  with  the  character  of  the  business  un- 
dertaking and  the  extent  of  the  work  which  is  undertaken 
by  the  copartnership.  In  all  cases,  however,  they  should 
cover  the  following  subjects:  The  partners  to  the  con- 
tract; the  firm  name;  the  purpose  for  which  the  copart- 
nership is  formed;  the  investment  of  the  parties  and  the 
division  of  profits  and  losses;  the  character  of  the  account- 
ing system;  the  conduct  of  the  business;  the  method  of 
management;  the  rights  of  the  partners;  the  dissolution 
of  the  partnership. 

The  first  clause  in  the  articles  of  copartnership  should . 
give  the  names  and  business  addresses  of  the  several  mem- 
bers. Since  a  partnership  is  a  contract,  only  those  compe- 
tent to  enter  into  such  agreements  can  form  a  partner- 
ship. The  list  includes  natural  persons  possessing  the  nec- 
essary qualifications,  other  partnerships,  and,  in  cases 
where  the  charter  specifically  provides  for  such  unions 
and  the  laws  pennit,  the  corporation.  In  connection  with 
the  names  of  the  parties,  the  style  of  the  firm  name  and 
the  place  of  business  should  be  given.  The  fii-m  name  may 
be  either  that  of  the  pai'ties  to  the  agreement,  as  A  &  B, 
one  or  more  of  the  parties  and  some  phrase  including  the 
others,  as  A,  B  &  Co.,  or  a  company  title,  as  The  Sunlight 
Company. 


36  MAURICE  H.  ROBINSON 

The  second  section  should  state  the  purposes  for  which 
the  partnership  is  formed,  and,  since  a  partner's  rights 
and  duties  extend  only  so  far  as  the  work  of  the  partner- 
ship necessarily  requires  for  its  successful  operation,  this 
clause  should  state  especially  the  extent  of  the  business 
and  the  limits  to  which  the  business  operations  of  the  firm 
extend.  Otherwise  constant  internal  trouble  and  often  liti- 
gation follow  in  order  to  determine  the  field  within  which 
the  acts  of  any  one  of  the  partners  is  binding  upon  the  oth- 
ers. For  example,  if  a  partnership  is  fomied  to  deal  in 
particular  products,  the  names  of  such  products  should  be 
given  in  detail.  Thus  teas  and  coffees  should  be  specified, 
rather  than  groceries,  where  it  is  the  purpose  of  the  agree- 
ment to  limit  the  business  to  these  two  articles. 

In  stating  the  investments  of  the  partners,  the  exact 
kinds  and  quantities  of  capital  contributed  by  each  should 
be  given  in  detail.  Where  the  investment  is  in  the  form 
of  money,  the  case  is  simple;  where  however,  as  in  many 
cases,  the  investment  is  a  particular  piece  of  property,  or 
particular  stocks  of  goods,  or  a  firm  name,  good-will,  trade 
marks,  etc.,  the  case  is  more  complex.  Especial  care  should 
be  taken  in  specifying  the  kinds  of  property  invested. 
Moreover,  since  the  partner  has  no  claim  to  interest  on 
his  investment,  unless  by  express  agreement,  the  value 
of  the  property  upon  which  he  is  to  receive  interest  and 
the  rate  at  which  interest  is  to  be  reckoned,  should  be  stat- 
ed in  the  original  agreement.  Furthermore,  since  the 
parties  usually  give  all  or  a  portion  of  their  time  to  the 
firm's  business,  the  salary  which  each  is  to  receive  should 
also  be  included  in  the  formal  agreement.  This  is  obvious- 
ly desirable  since  sometimes  partners  who  contribute  the 
larger  share  of  capital  investment,  and  therefore  are  en- 
titled to  a  larger  share  of  the  income  in  the  form  of  inter- 
est, may  be  less  valuable  members  from  the  salary  stand- 
point. It  is  clear,  of  course,  that  any  partner  who  draws 
a  larger  salary  from  the   firna  than  he   is   commercially 


MODERN  BUSINESS  ORGANIZATION  37 

worth,  is  to  that  extent  receiving  a  part  of  his  partner's 
profits. 

In  order  to  determine  the  profits  and  losses  it  is  nec- 
essaiy  to  employ  a  proper  accoimting  system.    It  is  tliere- 
fore  necessary  to  specify  that  proper  books  of  accounts 
should  be  kept  and  that  scientific  methods  should  be  used 
in  the  interpretation  of  the  books  for  the  purpose  of  de- 
tenniniug  the  respective  share  in  the  profits  to  which  each 
partner  is  entitled.    In  general  there  are  two  methods  of 
determining  the  relative  profits:  First,  from  an  audit  made 
by  the  members  of  the  firm  or  by  an  accountant  directly 
in  their  employ;  and  second,  by  an  audit  made  by  an  in- 
dependent professional  auditor.    It  is  of  course  unneces- 
sary to  provide  in  detail  as  to  how  the  accounts  should 
be  kept.    It  is  sufficient  to  require  that  the  proper  books 
be  provided  and  that  they  be  periodically  balanced  and 
audited.    It  is  also  desirable  to  provide  that  any  member 
may  have  an  accounting  made  whenever  evidence  of  fraud 
or  mismanagement  appears,  without  appeal  to  any  court. 
In  all  cases  where  a  partnership  conducts  a  business  of 
some  importance,  an  annual  audit  of  the  books  by  an  in- 
dependent professional  auditor  of  recognized  standing  and 
ability,  should  be  provided  for  in  the  articles  of  copart- 
nership.   Such  audits  are  desirable  not  only  because  they 
are  likely  to  prevent  fraud,  but  because  they  are  one  of 
the  important  aids  to  good  business  management. 

Owing  to  the  fact  that  the  acts  of  each  partner,  when 
connected  with  a  business  partnership,  bind  the  firm,  and 
that  generally  all  the  members  take  part  in  the  active  uiau- 
agement,  it  is  always  desirable  to  state  the  extent  to  whicli 
this  general  principle  shall  apply  in  any  particular  part- 
nership. For  example,  it  is  possible  to  provide  in  the  ar- 
ticles of  copartnership  that  no  one  of  the  members  shall 
have  power  to  enter  into  a  contract  involving  the  firm 
above  a  certain  sum,  without  the  agreement  of  all  the  part- 
ners, and  their  individual  signatures.     It  is  also  possible 


38  MAURICE  H.  ROBINSON 

to  provide  that  in  the  employment,  direction  and  manage- 
ment of  employes,  especially  of  heads  of  departments,  su- 
perintendents, etc.,  the  consent  of  all  members  shall  be 
obtained  before  contracts  are  entered  into.  It  is  also  de- 
sirable in  certain  cases  to  provide  that  one  of  the  mem- 
bers shall  act  as  manager.  This  may  be  done  by  an  agree- 
ment of  the  members  inserted  in  the  articles  of  copart- 
nership. On  the  other  hand,  it  may  be  desirable  to  pro- 
vide that  all  important  matters  involving  new  ventures 
or  new  methods  shall  first  be  discussed  by  all  the  members 
of  the  firm  and  adopted  only  after  the  consent  of  the  ma- 
jority has  been  obtained. 

The  respective  rights  and  duties  of  the  partners  should 
be  explicitly  stated  in  the  articles  of  copartnership.  The 
time  which  each  is  to  give  to  the  business,  the  extent  to 
which  they  may  be  engaged  in  outside  undertakings,  the 
right  to  an  accounting,  the  right  to  purchase  or  sell  land  or 
other  proi^erty  belonging  to  the  firm,  the  right  to  make 
contracts,  the  right  to  undertake  individual  obligations 
which  may  interfere  with  the  credit  of  the  partnership — 
all  these  are  proper  subjects  for  determination  before  a 
partnership  is  organized,  to  be  included  within  the  foiinal 
contract  under  which  it  is  operated. 

It  is  also  desirable  to  specify  in  the  articles  of  copart- 
nership under  what  conditions  a  partner  may  withdraw, 
what  are  his  rights  in  case  of  dissolution,  and  his  share 
of  the  firm's  good- will.  The  dissolution  of  any  partner- 
ship may  of  course  be  provided  for  in  the  contract.  This, 
however,  is  often  left  to  the  mutual  consent  of  the  parties. 
In  certain  cases  it  may  be  forced  upon  them  as  a  result 
of  unfortunate  circumstances.  Wherever  dissolution  is 
not  provided  for  in  the  original  contract,  and  in  most  cases 
even  though  such  be  the  case,  a  special  clause  should  be 
inserted  setting  forth  the  terms  under  which  any  one  mem- 
ber may  withdraw.  Circumstances  may  arise  which  render 
it  exceedingly  desirable  for  some  one  member  to  withdraw 


MODERN  BUSINESS  ORGANIZATION  39 

from  the  fimi  and  cuo^age  in  otlicr  business  activities,  or 
to  retire  from  business  entirely.  At  the  same  time  it  may 
be  exceedingly  desirable  for  the  other  members  to  con- 
tinue the  business.  In  such  a  case  the. retiring  member  is, 
without  any  previous  arrangements,  entirely  at  the  mercy 
of  those  who  remain.  And  it  is  too  often  the  case  that  the 
retiring  member  fails  to  get  his  share  of  the  property  and 
the  property  rights  of  the  partnership.  It  is  of  course  im- 
possible to  provide  in  advance  for  every  contingency;  it 
is  however  possible  in  all  cases  to  provide  for  the  with- 
drawal of  any  one  member  and  for  a  proper  division  of 
both  the  property  and  good-wdll  of  the  firm  in  case  it  is 
found  desirable  for  any  one  to  retire. 

It  is,  of  course,  impossible  to  provide  for  all  the  con- 
tingencies that  may  arise  in  the  conduct  of  any  business, 
even  those  of  the  simplest  character,  no  matter  how  per- 
fectly the  general  princii^les  of  the  partnership  are  stated 
or  how  explicitly  the  details  are  dra^\Ti  up.  Much  must 
therefore  depend  upon  the  good  faith  of  the  parties  to  the 
agreement.  In  early  times  the  partnership  originally 
seems  to  have  gro^^Tl  out  of  the  family  relationship.  A 
father  develops  a  business  enterprise,  and  upon  his  son's 
coming  of  age,  gives  him  an  interest  in  it.  Later  other 
sons  and  sons-in-law  are  added  until  the  organization  be- 
comes of  considerable  size.  When  the  father  dies,  the  tie 
that  binds  the  organization  loses  a  part  of  its  family  char- 
acteristics. Gradually  favorite  clerks  and  expert  work- 
men are  taken  into  partnership,  until  the  last  trace  of  its 
original  character  is  lost.  Even  though  it  retains  none 
of  the  ties  that  bind  the  family  together,  there  still  needs 
to  be  obseiwed  between  the  members  of  the  partnership 
the  same  good  faith  that  ordinarily  exists  within  the  fam- 
ily circle.  The  partnership,  therefore,  above  all  other 
forms  of  business  organization,  demands  the  highest  stand- 
ard of  business  honor.  Tlie  members  of  a  partnership  may 
deceive  those  from  whom  they  purchase  materials,  cheat 


40  MAURICE  H.  ROBINSON 

their  customers,  and  such  business  sins  may  be  overlooked 
if  not  forgiven.  But  lack  of  good  faith  between  partners 
is  death  to  this  form  of  business  organization. 

Again,  owing  to  the  right  of  each  member  of  the  part- 
nership to  take  part  in  the  business  management,  this  form 
of  organization  cannot,  under  the  most  favorable  condi- 
tions of  business  morals,  be  used  for  conducting  the  larger 
business  enterprises.  Whenever  many  men  become  par- 
ties to  an  organization,  they  must  content  themselves  with 
choosing  leaders  and  surrender  their  rights  to  partake  in 
the  active  management  to  a  select  few.  While  the  part- 
nership may  designate  one  of  its  members  as  business  man- 
ager, still  the  important  questions  connected  with  the  ad- 
ministration of  a  business  in  the  larger  sense  must  come 
before  all;  consequently  the  partnership  is  fitted  for  those 
business  enterprises  where  only  a  few  men  co-operate. 

Finally,  it  follows  from  this  fact  that  the  partnership 
can  ordinarily  command  only  a  limited  amount  of  capital, 
and  thus  its  operations  must  be  confined  to  those  fields 
where  small  plants  and  small  establishments  operate  with 
the  greatest  economy.  Accordingly  partnerships  are  the 
characteristic  method  of  organization  for  conducting  small 
manufacturing  establishments,  retail  stores,  brokerage 
business,  contracting  on  a  small  scale,  and  for  professional 
services  where  the  personal  element  is  of  importance.  For 
larger  undertakings,  those  requiring  a  larger  investment 
of  capital,  the  corporate  form  of  organization  is  better 
adapted. 

The  Corporation. 

The  corporation  in  its  most  perfect  form  unites  so  far 
as  possible  the  best  features  of  the  individual  proprietor- 
ship and  the  partnership.  Like  the  former  it  is  an  indi- 
vidual from  the  business  and  legal  point  of  view;  like  the 
latter  it  is  composed  of  a  group  of  individuals  whose  cap- 
ital and  skill  have  been  imited  into  one  organic  union. 


MODERN  BUSINESS  ORGANIZATION  41 

According  to  Blackstone,  *'the  corporation  is  an  artifu-ial 
person  created  for  preserving  in  perpetual  succession  cer- 
tain rights  which  being  conferred  on  natural  persons  only 
would  fail  in  the  process  of  time." 

The  leading  characteristic  of  the  corporation  is,  accord- 
ing to  the  above  definition,  its  artificial  personality.  Be- 
ing artificial  it  is  created  by  some  act  of  man,  and  being 
a  person  it  is  a  business  unit  made  up  of  a  group  of  natural 
pei-sons  who  have  lost  their  identity,  from  the  standpoint 
of  the  community,  for  the  purpose  of  undertaking  some 
particular  business  enterprise.  In  both  these  respects  the 
corporation  differs  radically  from  the  partnership.  The 
partnership  is  formed  by  mutual  consent  and  agreement 
of  the  parties.  The  corporation,  on  the  contrary,  consid- 
ered both  from  the  historical  and  from  the  present  point 
of  view,  can  be  formed  only  through  the  foiTnal  action  of 
some  duly  authorized  political  body,  such,  for  example, 
as  the  legislature  of  one  of  the  states  that  make  up  the 
American  Union. 

On  this  account  the  development  of  the  corporation  has 
undoubtedly  been  somewhat  slower  than  would  have  been 
the  case  had  individuals  been  free  to  unite  into  corpora- 
tions simply  by  signing  an  agreement  to  that  effect.  Un- 
til comparatively  recent  times,  that  is,  until  early  in  the 
last  century,  corporations  were  authorized  only  by  a  special 
act  of  some  legislative  assembly.  Beginning  about  1825, 
however,  several  states  introduced  the  policy  of  providing 
for  the  formation  of  coi'porations  under  a  general  corpora- 
tion act,  on  comphing  with  the  terms  of  which  and  pay- 
ing the  required  fees  of  registration,  companies  were  char- 
tered by  some  public  officer  designated  for  that  purpose, 
generally  the  secretary-  of  state.  The  change  from  incor- 
poration by  special  act  to  incorporation  under  a  general 
act  was  advocated  and  finally  adopted  in  all  the  American 
states  for  the  follo\^ing  reasons:  Under  the  fonner  meth- 
od it  became  customary  to  grant  special  privileges  to  cer- 


42  MAURICE  H.  ROBINSON 

tain  corporations  backed  by  powerful  interests  or  by 
friends  in  the  legislature ;  legitimate  business  interests  hav- 
ing no  influence  and  no  friends  at  court  found  difficulty 
in  securing  a  charter  at  all;  moreover,  the  legislatures  were 
in  session  only  part  of  the  time,  and  it  was  often  found 
desirable  to  form  a  corporation  to  undertake  some  special 
business  enterprise  when  the  legislatures  were  not  in  ses- 
sion. Finally,  it  came  to  be  generally  recognized  that  free- 
dom of  incorporation  rather  than  incorporation  at  the  will 
of  some  political  authority  was  demanded  by  the  legiti- 
mate business  interests  of  every  community.  Consequent- 
ly, under  the  influence  of  these  three  forces,  the  former 
method  was  gradually  abandoned,  and  the  method  of  in- 
corporation under  a  general  act  was  almost  universally 
adopted.  In  some  states,  however,  at  the  present  time, 
certain  kinds  of  corporations  can  be  formed  only  by  special 
act  of  the  legislature,  and  in  other  states  the  legislature 
reserves  the  right  to  incorporate  companies  directly  when- 
ever in  their  judgment  the  public  interests  demand  such 
action. 

In  most  states,  however,  since  the  middle  of  the  nine- 
teenth century,  any  group  of  men  can  form  themselves  into 
a  corporation  for  the  purpose  of  undertaking  any  legitimate 
business  enterprise,  simply  by  complying  with  the  provi- 
sions of  the  general  act,  filing  their  charter  with  the 
secretary  of  state  and  paying  the  fees  required  by  law. 
The  usual  process  by  which  this  is  accomplished  will  be 
described  in  a  subsequent  section. 

As  a  necessary  result  of  the  method  by  which  corpora- 
tions are  formed,  namely,  by  an  act  of  some  political 
authorit}^  those  in  actual  existence  may  lack  some  of  the 
characteristics  which  are  necessarily  present  in  a  theoret- 
ically perfect  corporate  organization.  Moreover,  as  would 
naturally  be  expected,  the  earlier  corporations  have  only 
a  portion  of  these  natural  characteristics,  and  even  at  the 
present  time  some  corporations  which  lack  some  of  the 


MODERN  BUSINESS  ORGANIZATION  43 

characteristics  that  belong  to  such  organizations  arc  cre- 
ated by  certain  states.  The  four  most  important  of  these 
characteristics  will  ho  clcscril)cd  in  the  following  division. 

The  Corporate  Characteristics. 

In  the  corporation,  as  organized  at  the  present  time, 
liability  for  debts  due  creditors  is  by  law  placed  upon  the 
business  enterprise  which  the  corporation  controls,  rather 
than  upon  the  individuals  which  compose  the  corporation. 
The  individual  stockholder  is  consequently  relieved  of 
personal  liability,  and  in  case  of  failure  loses  his  financial 
investment  only. 

The  adoption  of  this  principle  in  law  has  been  of  slow 
growth.  The  Romans,  under  whose  system  of  jurispru- 
dence the  corjDoration  first  became  important,  recognized 
this  principle  to  a  limited  extent.  It  was  not,  however, 
until  the  fifteenth  or  sixteenth  century  in  England  that 
the  corporation  achieved  much  importance  in  the  business 
world,  and  even  then  the  limitation  of  liability  was  au- 
thorized in  the  case  of  certain  corporations  only.  As  a  gen- 
eral feature  belonging  to  all  corporations  this  peculiar  priv- 
ilege of  the  corporation  was  not  adopted  generally  until 
the  early  part  of  the  nineteenth  century.  In  the  United 
States  there  were  only  about  half  a  dozen  corporations 
created  before  1789,  and  the  number  was  exceedingly  lim- 
ited until  after  the  beginning  of  the  nineteenth  century. 
With  the  advent  of  railroads,  at  the  end  of  the  first  quar- 
ter of  the  nineteenth  century,  corporations  were  formed 
in  increasing  numbers  for  the  purjDose  of  operating  rail- 
roads, canals,  and  other  important  enterprises.  In  some 
cases  they  were  granted  limited  lialjility,  but  in  general 
it  was  not  until  the  middle  of  the  last  century  that  this 
right  was  generally  recognized  in  the  statute  law  of  the 
various  states  of  the  Union. 

In  theory  the  adoption  of  the  principh'  of  limited  lia- 
bility in  law  follows  from  the  recognition  of  the  corporate 


44  MAURICE  H.  ROBINSON 

personality,  a  personality  distinct  from  that  of  the  indi- 
vidual stockholders  who  compose  it.  To  conceive  the 
corporation  as  an  individual,  one  must  lose  sight  of  the 
persons  of  which  it  is  made  up;  when  this  conception  is 
reached,  the  natural  individuals  being  lost  sight  of,  liability 
for  debt  is  placed  upon  the  artificial  personage  in  whom 
all  the  individual  stockholders  are  merged.  In  practical 
affairs,  however,  the  adoption  of  the  principle  is  to  be 
credited  to  other  causes.  In  the  early  part  of  the  nine- 
teenth century  New  York  and  Massachusetts  were  the 
leading  states  from  an  industrial  point  of  view.  Th,e  dan- 
gers of  investment  in  partnerships  large  enough  to  carry 
on  the  business  imdertakings  demanded  by  the  times  called 
for  changes  in  the  corporation  law,  of  which  the  most  im- 
portant was  the  adoption  of  this  particular  principle.  The 
legislature  of  New  York  saw  the  opportunity  and  granted 
the  privilege  demanded.  The  result  was  a  remarkable  de- 
velopment of  the  corporation  and  of  corporate  enterprises 
in  that  state.  Its  adoption  in  New  York  was  followed  by 
the  same  action  in  Massachusetts,  and  later  in  other  states, 
with  similar  results. 

After  this  principle  had  been  generally  adopted,  none 
of  the  harmful  consequences  which  had  been  freely  pre- 
dicted followed.  Indeed,  from  a  strictly  economic  point 
of  view  there  are  good  and  sufficient  reasons  for  its  justifi- 
cation. As  already  stated,  in  case  of  failure,  where  the 
principle  of  limited  liability  is  granted,  the  burden  of  the 
failure  is  placed  upon  the  business  itself  rather  than  upon 
individuals  and  other  business  enterprises  in  which  the 
individual  stockholders  have  invested.  Those  who  sell 
goods  to  a  partnership  are  often  glad  to  extend  credit  far 
beyond  the  point  which  the  business  of  the  firm  justifies, 
especially  in  cases  of  probable  bankruptcy,  in  order  to 
collect  of  some  of  the  wealthy  members  of  the  organiza- 
tion. Those  who  sell  to  a  corporation,  on  the  contrary, 
know  that  the  corporate  property  only  is  Uable  for  the 


MODERN  BUSINESS  ORGANIZATION  45 

debt  aud  hence  discretion  in  extending  credit  to  a  corpora- 
tion is  a  necessary  result.  From  the  standpoint  of  the 
stockholder  the  adoption  of  this  principle  has  been  one  of 
the  powerful  incentives  to  save  and  invest  in  business 
enterprises.  This,  to  a  certain  extent,  accounts  for  the 
rapid  development  of  industry  through  the  agency  of  the 
corporate  form  of  enterprise.  In  some  cases,  as  for  ex- 
ample, the  national  banks  of  the  United  States,  the  prin- 
ciple of  limited  liability  is  only  partially  adopted.  Each 
stockholder  is  liable  not  only  for  the  par  value  of  his  stock, 
but  for  an  additional  amount  equal  to  such  par  value.  This 
is  called  double  liability,  and  is  justified  on  the  ground 
that  national  banks  should  be  absolutely  safe  under  any 
and  all  circiunstances. 

Individuals  die,  partnerships  are  terminated  by  agree- 
ment and  are  dissolved  for  many  unforeseen  reasons;  but 
corporations  theoretically  may  live  forever.  When  an  indi- 
vidual proprietor  dies,  it  is  of  course  possible  that  his  busi- 
ness may  be  transferred  to  some  one  else  and  thus  contin- 
ued. In  many  cases  however  such  enterprises  are  aban- 
doned on  account  of  the  failure  to  find  anyone  who  cares 
to  undertake  the  proprietorship  and  management  of  the 
l)usiness.  AMiere  a  partnership  is  dissolved,  some  of  the 
partners  may  desire  to  continue,  and  they  together  with 
other  men,  may  form  a  new  partnership  for  the  conduct  of 
the  same  business  enterprise.  It  is,  however,  difficult  to 
find  a  group  of  men  who  are  able  to  work  harmoniously 
in  the  intimate  business  relationship  which  the  i)ai'tner- 
ship  demands,  and  it  is  usually  difficult  for  any  one  of  the 
partners  to  find  a  person  who  cares  to  assume  the  responsi- 
bilities which  belonged  to  a  former  member  of  the  organiza- 
tion. 

In  the  case  of  a  corporation,  conditions  are  much  more 
favorable  to  the  continued  existence  of  the  organization. 
As  stated  by  Blackstone,  the  coi-jDoration  is  fonned  for 
preserving  in  perpetual  succession  rights  which  otherwise 


46  MAURICE  H.  ROBINSON 

might  terminate  owing  to  the  death  of  the  individuals  to 
whom  they  belong.  In  the  corporation  this  particular  fea- 
ture, namely,  perpetual  existence  of  the  corporate  organ- 
ization, is  accomplished  by  means  of  the  substitution  of 
one  person  for  another  through  the  transfer  of  property 
rights.  When  A  dies,  his  shares  of  stock  are  transferred 
to  his  legal  heir  and  the  latter  takes  his  place  in  the  corpo- 
rate organization.  Thus  it  is  only  by  the  death  of  every 
individual  at  the  same  time,  an  impossible  supposition, 
that  the  existence  of  the  corporation  could  be  terminated 
in  the  ordinary  way.  Coi-porations  are,  however,  termi- 
nated by  and  as  a  result  of  their  own  act,  properly  author- 
ized; or  where  such  termination  is  legally  provided  for  in 
the  articles  of  corporation;  or  by  an  act  of  the  public  au- 
thority by  whom  they  are  legally  created.  Under  ordinary 
circumstances,  hoAvever,  it  is  proper  to  say  that  the  cor- 
poration enjoys  perpetual  existence. 

The  shares  of  a  corporation  are  treated  as  personal 
property  and  may  be  sold  at  any  time  without  affecting 
the  corporate  existence.  For  this  reason  the  investments 
are  divided  into  small  amounts  of  such  size  that  the  ordi- 
nary investor  may  purchase  at  least  one  share.  Corpora- 
tions appealing  to  the  smaller  investors  subdivide  their 
capital  stock  into  shares  of  smaller  denominations,  while 
those  which  appeal  to  the  larger  investors  issue  their 
shares  in  larger  amounts.  Consequently  by  a  proper  sub- 
division of  the  capital  stock  into  shares,  any  portion  of 
the  business  which  the  corporation  conducts  may  be  sold 
and  transferred  from  one  person  to  another  at  any  time. 
In  this  respect  the  corporation  is  in  striking  contrast  to 
the  individual  proprietorship  and  the  partnership.  The 
individual  proprietor  must  sell  his  property  as  a  whole 
except  in  cases  where  it  may  be  operated  successfully  in 
parts.  To  sell  a  portion  of  his  property  without  division, 
in  reality  creates  a  partnership  of  interests.  He  must 
therefore  find  a  purchaser  who  desires  just  such  a  business 


MODERN  BUSINESS  ORGANIZATION  47 

enterprise  as  he  has  to  sell.  The  partner  cannot  sell  his 
interests  without  the  consent  of  all  the  other  partners, 
and  therefore,  in  order  to  sell,  he  must  find  a  man  who  is 
personally  acceptable  to  all  members  of  the  firm,  ordinarily 
a  diflicult  task.  Moreover,  a  partner  who  desires  to  sell 
out  his  interests  sometimes  finds  that  his  business  asso- 
ciates are  too  ready  to  take  advantage  of  his  desire  to  sell 
unless  such  contingency  has  been  carefully  provided  for 
in  the  articles  of  copartnership.  Furthermore,  the  selec- 
tion of  a  successor  is  made  doubly  difficult  owing  to  the 
fact  that  all  the  partners  are  managers,  and  hence  the 
successor  of  one  desiring  to  sell  his  interest  must  be  not 
only  an  acceptable  business  companion,  but  a  good  busi- 
ness man. 

In  a  corporation  the  management  is  in  the  hands  of 
officers  selected  from  the  body  of  stockholders  and  em- 
ployes under  their  direction.  The  ordinary  stockholder, 
therefore,  takes  no  active  part  in  the  management.  He 
can  sell  his  interests  without  impairing  the  efficiency  of 
the  management.  The  market  for  shares  in  a  corporation 
is  consequently  much  broader  than  in  the  case  of  a  part- 
nership. Those  unable  to  take  part  in  the  management, 
including  widows,  children,  institutions  having  trust  funds, 
and  even  other  corporations,  are  in  a  position  to  ])urchase 
and  hold  shares.  For  the  purpose  of  making  such  trans- 
fers the  facilities  of  a  broad  market  are  funiished  by  the 
stock  exchanges  which  exist  in  all  the  larger  cities. 

In  its  management  the  corporation  is  like  the  individual 
proprietor.  Its  control  is  centralized  into  one  organic  unit, 
a  board  of  directors  chosen  by  the  stockholders  to  repre- 
sent the  coi-poration  and  to  determine  its  business  policy. 
It  thus  differs  from  the  partnership  where  all  the  members 
are  theoretically  at  least  managers,  and  where  actually  all 
generally  take  part  in  the  active  management.  It  is  of 
course  true,  as  before  stated,  that  the  active  management 
of  a  partnership  may  be  entrusted  to  a  managing  partner. 


48  MAUEICE  H.  ROBINSON 

This,  however,  is  the  exception,  and  not  the  rule.  The 
general  efficiency  of  the  management  in  a  partnership  is 
detennined  by  the  general  business  ability  of  all  the  part- 
ners; in  the  corporation  the  stockholders  are  by  law  re- 
quired to  select  a  few  of  their  number  to  take  active  charge 
of  the  business  policy.  While  it  is  possible  that  in  certain 
cases  men  of  small  business  capacity  have  been  chosen  to 
act  as  directors,  as  a  general  thing,  those  having  the  great- 
est abilitj^  as  business  managers  are  chosen  upon  the  board 
of  directors.  The  corporation,  therefore,  possesses  all  the 
advantages  of  the  individual  proprietor  so  far  as  prompt- 
ness of  action  and  ability  to  meet  emergencies  are  con- 
cerned, and  all  the  advantages  of  the  partnership  with 
respect  to  collective  wisdom. 

The  authority  vested  in  the  central  administration  is 
subdivided  by  departments  and  subdepartments,  as  will 
be  more  fully  exi)lained  in  the  section  on  operating  organ- 
ization. In  their  external  organization  corporations  re- 
semble an  army  with  its  general  staff,  generals,  colonels, 
captains,  lieutenants  and  soldiers.  In  the  corporation  the 
board  of  directors  corresponds  to  the  general  staff.  Under 
the  board  of  directors,  committees,  the  president,  vice- 
presidents  in  charge  of  important  departments,  division 
superintendents,  and  section  bosses,  form  the  complete 
organization,  all  resting  upon  the  authority  of  the  central 
administration.  In  the  organization  every  detail  of  ad- 
ministration is  parcelled  out;  the  work  of  management  is 
specialized;  the  responsibility  is  subdivided  from  the  cen- 
tral office  to,  the  lowest  ranks,  so  that  every  one  has  his 
duty,  and  methods  for  determining  the  efficiency  with 
which  each  works  can  be  successfully  applied.  The  art 
of  business  management  under  the  corporate  form  of  or- 
ganization becomes  a  science,  and,  in  our  larger  corpora- 
tions, men  of  the  broadest  experience  and  most  far-seeing 
ability  are  needed  to  prevent  disaster  and,  much  more,  to 
insure  success. 


MODERN  BUSINESS  ORGANIZATION  49 

The  four  characteristics  of  the  coi*poration  which  have 
been  described  above,  namely,  limited  liability,  perpetual 
existence,  ability  to  transfer  interests,  and  centralized 
management,  are  features  which  when  coml)ined  in  organic 
union,  distinguish  the  corporation  from  other  foiins  of 
business  organization. 

Classes  of  Corporations. 

Corporations  may  be  divided  into  three  main  classes, 
each  of  which  differs  in  some  of  the  imporiant  character- 
istics, but  all  are  alike  in  possessing  a  majority  of  the 
features  which  have  just  been  described.  These  three 
classes  are  (1)  municipal  corporations,  (2)  social  or  ele- 
emosynary corporations,  and  (3)  business  corporations. 

The  municipal  corporation  is  a  political  body  organ- 
ized for  the  purpose  of  carrying  on  certain  political  and 
often  business  functions.  An  example  of  this  class  is  the 
ordinary  city.  As  a  corporation  it  has  a  perpetual  exist- 
ence and  a  centralized  government.  Furthennore  the 
property  of  individual  citizens  cannot  be  taken  to  satisfy 
the  debts  which  the  city  government  owes.  The  city,  how- 
ever, lacks  one  of  the  ordinary  characteristics  of  the  corpo- 
rate organization,  namely,  a  citizen  cannot  sell  his  citi- 
zenship and  thus  dispose  of  his  portion  of  the  city's  prop- 
erty. When  he  leaves  the  city  domains  he  relinquishes  all 
rights  to  his  investment  in  the  city,  which  by  the  payment 
of  taxes  he  has  helped  to  accumulate. 

The  club,  the  church,  the  hospital,  the  university,  are 
examples  of  social  corporations.  In  all  of  these  organiza- 
tions the  liability  of  the  individual  member  is  limited  by 
his  investment,  and  the  organization  is  perpetuated  l)y  the 
initiation  of  new  members.  In  each  case  they  select  a  board 
to  conduct  the  business,  and  again  are  like  the  municipal 
corporation  in  respect  to  the  right  of  the  individual  to 
transfer  his  investment.     '\Vhen  a  person  resigns  from  a 

club,  he  loses  his  right  to  a  share  in  the  common  property. 
B— n— 4 


50  MAURICE  H.  ROBINSON 

He  cannot  sell  his  membership.  The  same  is  true  of  the 
other  organizations  comprised  within  this  particular  class. 

Business  corporations  differ  in  their  important  charac- 
teristics from  the  above  two  classes  in  one  respect  only, 
namelj^,  the  interest  of  each  individual  is  represented  by 
a  share  called  a  stock  certificate,  which  can  be  transferred 
as  other  personal  property.  This  is  a  natural  result  of  the 
purpose  for  which  business  organizations  are  formed, 
namely,  to  utilize  the  capital  and  skill  of  the  members  in 
earning  the  profits  to  be  divided  among  themselves.  Mu- 
nicipal and  social  corporations,  on  the  other  hand,  while 
engaged  in  perfomiing  some  useful  work  in  the  service 
of  their  members  or  of  the  community,  use  the  results  of 
their  work  as  a  common  fund  and,  except  at  the  termina- 
tion of  their  existence,  such  corporations  do  not  subdivide 
their  surplus  earnings. 

Business  corporations  are  generally  subdivided  into 
classes  based  upon  the  character  of  the  work  which  they 
undertake,  as  industrial  corporations,  commercial  corpo- 
rations, public  service  corporations,  and  financial  corpo- 
rations. The  first  includes  all  classes  of  manufacturing 
plants  and  mining  companies.  The  second  includes  whole- 
sale and  retail  stores;  the  third  class  includes  railroads, 
electric  traction  companies,  gas  companies,  electric  light 
companies,  water  supply  companies,  etc.  The  last  class 
includes  banks,  trust  companies,  and  insurance  companies. 

This  classification  is  of  importance  for  two  reasons: 
First,  public  authorities  when  granting  charters  determin- 
ing the  conditions  under  which  corporations  may  live  and 
operate,  grant  more  extensive  powers  to  the  last-named 
classes,  but  at  the  same  time  regulate  their  internal  affairs 
and  their  business  operations  with  much  greater  strict- 
ness. Hence  in  the  corporation  act  of  various  states  there 
are  ordinarily  at  least  three  parts — one  under  which  the 
industrial  and  commercial  corporations  are  chartered,  one 
under  which  public  service  corporations  are  chartered,  and 


MODERN  BUSINESS  ORGANIZATION  51 

a  third  authorizing  the  formation  of  the  financial  and 
moneyed  corporations.  The  conditions  of  organization  and 
their  rights  during  existence  differ  widely  in  the  various 
classes.  In  addition  to  obtaining  their  charter,  public 
service  corjDorations  are  usually  obliged  to  obtain  certain 
privileges  called  franchises  from  the  municipality  or  terri- 
tory within  which  they  cany  on  their  business.  Indus- 
trial and  commercial  corporations,  on  the  other  hand,  are 
in  a  position  to  do  business  as  soon  as  their  charter  is 
granted  by  the  state. 

Since  corporations  chartered  under  the  various  sections 
of  the  corporation  act  are  ordinarily  kept  distinct  by  state 
officials,  it  is  often  possible  to  secure  statistics  showing 
the  amount  of  investment,  the  size  of  corporations,  and  the 
general  character  of  their  operations  in  each  one  of  the 
particular  kinds  of  business  enteiprises  which  have  been 
described.  This  feature  of  the  corporation  law  is  thus  of 
considerable  importance  in  enabling  the  economist,  legis- 
lators and  business  men  to  compare  development  in  the 
various  lines  of  business  enterprise,  and  draw  conclusions 
that  are  of  vahie  in  relation  to  the  industrial  development 
of  any  particular  state  or  section. 

Advantages  and  Disadvantages. 

The  advantages  resulting  from  the  important  charac- 
teristics of  the  corj^oration,  as  given  above,  namely,  limi- 
tation of  liability  of  the  individual  stockholder,  perma- 
nence of  the  corporate  existence,  transferability  of  rights 
in  the  corporation,  and  its  centralized  foiTn  of  government, 
have  led  to  its  extensive  adoption  in  recent  years.  In  ad- 
dition to  the  characteristics  already  described,  it  has  the 
advantage  of  great  flexibility  in  the  number  of  those  inter- 
ested and  in  the  amount  of  capital  which  it  employs.  A 
corporation  can  be  formed  in  many  states  having  as  few 
as  three  stockliolders,  or  it  may  have  any  number.  In 
some  states  a  corporation  may  be  fonned  composed  of  only 


52  MAURICE  H.  ROBINSON 

one  person  and  therefore  having  only  one  stockholder.  In 
this  respect  it  differs  markedly  from  the  individual  pro- 
prietor or  the  partnership.  By  definition,  the  individual 
proprietor  is  limited  to  one  person;  for  practical  reasons 
the  partnership  is  limited  to  comparatively  few  and  at- 
tains its  greatest  success  when  it  unites  from  three  to  ten 
pei*sons  only.  In  rare  cases  partnerships  have  been  formed 
with  twenty  or  more  members;  such  partnerships  repre- 
sent an  unusual  type  and  are  usually  disrupted  owing  to 
internal  dissensions. 

Owing  to  its  flexibility  in  numbers,  the  corporation  may 
have  either  a  small  capital  or  a  large  capital,  according  to 
the  nature  of  the  business  which  it  is  formed  to  operate. 
It  therefore  may  compete  with  the  individual  proprietor 
and  the  partnership  in  its  economy  in  the  use  of  capital, 
and  it  may  under  other  circumstances  comprise  a  sufficient- 
ly large  number  of  people  to  gather  the  amount  of  capital 
sufficient  to  conduct  the  business  of  an  entire  industry. 

In  contrast  with  the  advantages  of  the  corporation  it 
is  well  to  notice  that  there  are  certain  disadvantages  that 
necessarily  belong  to  this  form  of  organization.  In  the 
first  place,  as  the  corporation  is  a  creature  of  the  state, 
it  is  usual  to  charge  certain  fees  for  incorporation  of  a 
business  enterprise  in  the  corporate  form.  The  fees 
charged  vary  in  different  states  from  a  merely  nominal 
amount  in  some,  to  an  amount  that  constitutes  a  tax  upon 
the  industry  in  others.  Most  states  also  charge  an  annual 
license  fee  which  must  be  paid  regularly  in  order  that  the 
corporation  may  continue  its  existence.  In  addition  to 
these  fees  for  incorporation  and  for  continued  existence, 
some  states  provide  a  special  form  of  taxation  for  corpo- 
rations, and  thus  discriminate  against  this  form  of  organ- 
ization as  compared  with  the  individual  proprietor  or  the 
partnership.  A  most  marked  example  of  this  kind  has 
recently  been  enacted  by  the  United  States  Congress  in 
the  foi-m  of  the  Federal  Corporation  Tax,  requiring  all 


MODERN  BUSINESS  ORGANIZATION  53 

corporations  operating  in  the  United  States  to  pay  to  the 
national  treasury  annually  one  per  cent  of  their  net  profits. 
Tliis  tax,  it  is  expected,  will  yield  something  over  twenty- 
five  million  dollars  annualh',  representing  the  l)U]'den  of 
the  entire  amount  of  the  tax  upon  enterprises  conducted 
under  the  coi-porate  form. 

In  the  second  place,  the  states  usually  require  corpo- 
rations to  make  certain  reports  to  the  secretaiy  of  state, 
showing  their  financial  condition  and  other  details  in  re- 
gard to  their  internal  organization.  In  most  cases  such 
reports  may  be  prepared  directly  from  the  annual  state- 
ments made  by  the  company's  auditors.  In  certain  cases, 
however,  as,  for  instance,  the  railroads  in  the  United  States, 
the  annual  report  must  be  filed  as  of  the  thirtieth  of  June, 
whereas  a  large  number  of  the  corporations  make  their 
reports  cover  the  period  from  January  first  to  December 
thirty-first.  This  necessitates  considerable  additional  ex- 
pense owing  to  the  preparation  of  accounts  covering  a  dif- 
ferent period  from  that  which  the  company's  books  in- 
clude. Again,  states  in  many  cases  require  details  which 
would  not  ordinarily  be  furnished  by  the  regular  books 
of  the  company  thus  causing  additional  expense  on  this 
account. 

In  the  third  place,  the  corporate  form  of  organization 
necessitates  an  annual  meeting  of  the  stockholdei^  and  tlie 
preparation  of  elaborate  reports  for  their  information. 
While  most  of  the  stockholders  are  represented  by  proxy, 
the  expense  of  the  annual  meetings  cannot  be  entirely  dis- 
regarded. Tliis  expense,  however,  is  one  that  would  be 
entailed  upon  any  large  organization. 

In  the  fourth  place,  the  corporation  is  managed  by 
men  who  are  employed  for  the  purpose  and  paid  for  their 
work.  The  individual  proprietor  works  for  himself  and 
receives  all  the  profits  directly.  In  the  parinership  each 
one  ordinarily  feels  the  direct  connection  between  his  work 
and  its  reward.    The  managers  of  a  corporation,  being  paid 


54  MAURICE  H.  ROBINSON 

for  their  services,  are  not  under  the  same  influence  as  the 
individual  proprietor  and  the  partner.  It  is  therefore 
necessary  to  ajDply  elaborate  means  for  the  purpose  of  se- 
curing efficiency  in  management.  This  is  done  in  many 
cases  by  the  use  of  statistical  averages  comparing  the  re- 
sults of  one  manager  with  those  of  another,  and  making 
the  comiDensation  depend  largely  upon  the  results  of  the 
business  under  the  charge  of  any  particular  officer  or  em- 
ploye. Such  means  of  securing  efficiency,  however,  are  ex- 
pensive and  the  corporation  must  always  be  willing  to 
undertake  such  expenses,  considering  them  the  necessary 
disadvantages  of  this  particular  form  of  organization  to 
be  compensated  by  some  of  the  various  advantages  which 
have  been  named  above. 

In  the  fifth  place,  the  credit  of  a  corporation  depends 
entirely  upon  its  capital  and  its  business.  The  credit  of 
the  individual  j)roiDrietor  depends  not  upon  any  par- 
ticular business  enterprise,  but  upon  the  proprietor's 
entire  resources.  The  credit  of  the  partnership  is  de- 
pendent upon  the  entire  resources  of  all  the  partners 
combined.  Consequently,  in  comparison  with  these  forms 
of  organization,  the  corporation  is  often  unable  to  ex- 
tend its  credit  to  the  extent  that  is  possible  in  the  case 
of  the  individual  proprietor  or  the  partnership.  While  this 
limitation  of  credit  is  desirable  from  the  standpoint  of 
industrial  development  as  a  whole,  it  is  often  a  distinct 
disadvantage  to  individual  corporations. 

Notwithstanding  these  several  disadvantages,  the  cor- 
poration, owing  to  its  marked  advantages  over  other  forms 
of  organization,  has  shoT^Ti  remarkable  progress  and  de- 
velopment in  the  last  half  century.  To  quote  from  an  arti- 
cle by  the  author,  contributed  to  the  Yale  Review:  ** For- 
merly nearly  all  manufacturing  was  done  by  the  individual 
entrepreneur,  later  by  the  partnership,  now  by  the  corpo- 
ration; of  the  total  production  in  the  year  1900,  nearly 
eight  thousand  millions  in  dollars,  or  almost  60  per  cent 


MODERN  BUSINESS  ORGANIZATION 


55 


of  the  total  output,  was  the  work  of  the  corporation.  Out 
of  over  five  hundred  thousand  independent  e.stalili.shments 
in  the  United  States,  forty  thousand  in  round  numbers 
were  in  corporate  fomi.  The  corporations  were  12  per 
cent  in  number  and  produced  59.5  per  cent  of  the  output. 
The  partnerships  were  18.9  per  cent  of  the  total  number 
of  the  establishments,  producing  19.7  per  cent  of  the  total 
production.  Individuals  owned  78.8  per  cent  of  the  num- 
ber of  establishments  and  produced  only  20.6  per  cent  of 
the  total  amount  of  production.  In  certain  lines  the 
progress  of  the  corporation  has  been  particularly  rapid, 
namely,  in  the  manufacture  of  iron  and  steel,  agricultural 
implements,  coke,  gas,  electrical  apparatus,  manufactured 
ice,  rubber  goods,  photographic  goods,  etc.,  etc.  Thus  con- 
centration is  accomplished  through  the  corporation,  and  to- 
day, in  a  word,  the  cor2)oration  problem  has  to  all  intents 
and  purposes  superseded  the  trust  problem  of  the  previous 
decade." 

Since  1900  the  United  States  census  has  separated  all 
the  manufacturing  establishments  in  the  United  States 
into  four  classes,  as  follows:     The  individual  proprietor. 


Character   of 

Ownership  * 

Establij 

.hments 

1905 

1 

1900 

Number        1 

Per  cent 

1      Number         |     Per  cent 

United  States   

216,262          1 

100.0        1 

273,705                   100.0 

Individual     

113.961 

52.7 

22.2 

23.6 

1.5 

171.843 

62,627 

37,161 

2,074 

62  8 

Firm     

47,942 

51,156 

3,203 

22  9 

Incorporated  Co.   . . . 
Miscellaneous    

13.6 
0.7 

Products 

1 
Value 

905 

1                       1900 

1 

Per  cent 

Value            1  Per  cent 

United    States     

$14,802,147,087   | 

100.0 

1  $11,701,295,854  1        li»)  n 

Individual      

1,702.980,808 

1         11.5 

14.4 

73.7 

0.4 

1.837,599,35 

1 

15.7 

Firm   

2,132,619,830 

10,912.080,421 

54,466,028 

2.220,833.804 

7.600.019,056 

30,843.641 

19  0 

Incorporated    Co 

Miscellaneous    

O.'i.O 
0.3 

♦Special  reports  of  the  Census  Oflice.  Manufacturers,  Pt.  I,  1903,  p.  liv. 
The  tables,  vhile  not  exactly  comparable,  are  sufficiently  accurate  for  our 
purpose. 


56  MAURICE  H.  ROBINSON 

the  partnership,  the  incorporated  company,  and  miscella- 
neous fomis  of  business  organizations.  From  the  informa- 
tion thus  gathered  it  is  possible  to  measure  the  gro^Yth  of 
the  corporation  as  compared  with  other  forms  of  business 
organization,  at  each  of  the  census  periods.  The  table  on 
page  55  shows  the  changes  in  the  character  of  the  busi- 
ness organizations  that  took  place  in  the  five  years  from 
1900  to  1905.  It  is  probable  that  the  rate  of  growth  which 
the  corporation  maintained  in  the  years  from  1900  to  1905 
has  been  at  least  equal  during  the  period  from  1905  to  1910. 

rrr.  the  formation  of  the  corporation. 

Promotion. 

The  individual  proprietor,  having  command  of  the  nec- 
essary capital,  can  engage  at  once  in  any  lawful  business 
without  formality  of  any  kind.  The  formation  of  a  part- 
nership is  somewhat  more  complex  since  it  requires  the 
agi^eement  of  several  men,  each  contributing  a  share  of  the 
capital,  and  each,  under  ordinary  circumstances,  taking 
part  in  the  management  of  the  business.  When  the  capital 
has  been  collected  and  the  terms  of  the  partnership  ar- 
ranged, the  firm  may  then  purchase  its  plant  and  ma- 
chinery, appoint  superintendents,  hire  laborers,  and  at  once 
set  out  ujDon  its  business  career. 

Like  the  partnership,  the  corporation  requires  an  agree- 
ment among  several  men  to  contribute  capital  to  engage 
in  a  particular  line  of  business.  It  does  not,  however,  re- 
quire an  arrangement  between  the  parties  to  undertake 
the  active  work  of  management.  In  order  to  form  a  corpo- 
rate organization  the  voluntary  action  of  a  group  of  men 
is  necessary,  such  group  in  certain  cases  meeting  by  agree- 
ment and  drawing  up  the  terms  under  which  they  are  will- 
ing to  engage  in  some  particular  enterprise.  While  this 
method  is  common  in  small  undertakings,  it  is  not  adapted 
to  the  foimation  of  large  companies.    Owing  to  the  fact 


MODERN  BUSINESS  ORGANIZATION  57 

that  subscribers  to  the  shares  of  stock  in  a  corporate 
enterprise  usually  live  in  widely  separated  districts,  the 
larger  corporations  are  promoted  by  some  pei'son  who  de- 
votes his  time  to  formulating  a  plan  for  the  formation  of 
the  corporation,  securing  the  necessary  subscribers  to  the 
capital  stock,  and  arranging  the  details  connected  with  the 
beginning  of  its  legal  existence.  The  task  of  the  promoter 
consists  in  finding  and  selecting  the  opportunity  for  under- 
taking some  profitable  business  enterprise,  securing  the 
necessary  capital,  and  providing  at  the  beginning  efficient 
management. 

After  selecting  the  enterprise,  the  important  work  of 
the  promoter  is  in  securing  the  necessary  capital.  This 
may  be  accomplished  either  by  personal  solicitation  or  by 
advertisements  in  the  public  press.  In  smaller  corpora- 
tions, especially  those  having  a  local  constituency,  the  per- 
sonal solicitation  of  shareholders  is  the  usual  method  em- 
ployed. AVliile  more  expensive,  it  has  the  advantage  of  a 
direct  appeal  to  the  individual  and  gives  the  opportunity 
of  placing  before  him  sufficient  of  the  details  of  the  organ- 
ization and  business  to  enlist  his  support.  In  the  formation 
of  larger  enterprises,  it  is  usual  to  insert  advertisements 
in  the  financial  and  sometimes  the  daily  press,  appealing 
to  the  general  public  through  a  statement  showing  the 
character  of  the  enterprise,  the  securities  proposed  to  be 
issued,  and  usually  includes  a  statement  of  prospective 
earnings.  In  either  case,  when  the  subscriptions  are  com- 
pleted, the  promoter  must  take  out  a  charter  or  certificate 
of  incoi-poration  from  some  political  body  duly  authorized 
to  grant  the  same. 

The  Choice  of  a  State. 

In  centralized  governments  like  England  and  Prance, 
charters  for  business  enterprises  are  obtained  only  from 
the  central  government  and  consequently  the  promoters 
have  no  opportunity  to  choose  between  several  states,  each 


58  MAURICE  H.  ROBINSON 

authorized  to  grant  charters.  In  federal  governments,  like 
the  United  States  and  Australia,  there  is  usually  an  oppor- 
tunity to  choose  between  the  different  governments.  For 
some  enterprises  in  the  United  States,  however,  a  federal 
charter  is  required;  for  example,  a  banking  organization 
desiring  to  undertake  national  banking  functions.  In  this 
case  the  proposed  organization  has  the  choice  between  a 
state  charter  authorizing  it  to  become  a  state  bank,  or  a 
national  charter  authorizing  it  to  become  a  national  bank. 
In  the  former  case  it  is  for  practical  reasons  limited  to  the 
ordinary  commercial  work  of  the  bank;  in  the  latter  case 
it  may,  in  addition,  undertake  the  work  of  issuing  its  own 
bank  notes  and  circulating  them  in  the  form  of  paper 
money. 

In  the  case  of  an  ordinary  corporation  desiring  to  en- 
gage in  business  of  a  general  nature,  such  as  manufactur- 
ing, trading,  etc.,  it  is  at  the  present  time  necessary  to  se- 
cure a  charter  from  some  one  of  the  individual  states.  In 
the  case  of  banks,  railways,  and  public  service  corpora- 
tions, it  is  in  practically  all  cases  necessary  to  have  a 
charter  from  the  state  in  which  the  business  of  the  corpo- 
ration is  to  be  located.  For  manufacturing  and  trading 
concerns  the  case  is  different.  Ordinarily  such  a  corpora- 
tion may  take  out  a  charter  either  in  its  own  state,  or  in 
any  one  of  a  considerable  number  of  states  which  permit 
the  formation  of  corporations,  to  do  business  either  within 
its  o^\^l  borders,  or  in  other  states.  Consequently  the  pro- 
moter, having  the  choice  of  a  number  of  jurisdictions,  is 
in  a  position  to  select  that  one  which  he  considers  most 
favorable  to  the  future  success  of  the  corporation  which 
he  is  forming.  While  the  general  provisions  of  the  various 
states  have  a  striking  similarity,  they  differ  in  a  number 
of  points  which  are  of  considerable  importance  to  the 
future  of  a  corporation. 

In  some  states  the  corporation  law  and  policy  are  well 
settled  and  those  incorporating  under  such   states  have 


MODERN  BUSINESS  ORGANIZATION  59 

reason  to  believe  that  the  policy  observed  in  the  past  is 
likely  to  be  continnod  in  the  future.  Such  conditions  at- 
tract legitimate  ])usiness  enterprises.  Again,  the  fees 
charged  b}'  the  state  for  incorporating  a  company  and  for 
the  annual  license  differ  widely.  For  example,  Arizona 
charges  ten  dollars  for  the  incorporation  of  any  company, 
without  regard  to  the  amount  of  its  capitalization,  while 
Connecticut  charges  twenty-five  dollars  for  the  incorpora- 
tion of  a  company  having  a  capital  of  $10,000  to  $50,000,  and 
one  dollar  for  every  $2,000  of  capital  stock  authorized  of 
$50,000  or  more.  Tlie  rate  in  New  York  is  the  same  as  that 
of  Connecticut.  New  Jersey  has  a  more  liberal  policy 
than  Connecticut,  but  much  more  conservative  than  Ari- 
zona. The  New  Jersey  rates  are  twenty-five  dollars  for 
any  corporation  up  to  $100,000,  and  for  corporations  above 
this  amount  twenty  cents  for  every  $1,000  of  the  total 
amount  of  capital  stock  authorized.  Maine,  fonnerly  one 
of  the  more  conservative  states,  has  recently  entered  upon 
a  policy  of  granting  charters  upon  favorable  teims,  and 
requires  a  fee  of  ten  dollars  for  $10,000  capitalization,  fifty 
dollars  for  a  corporation  from  $25,000  to  $500,000  inclu- 
sive; and  for  corporations  above  $500,000,  one  dollar  for 
every  $10,000  of  authorized  capital  stock. 

Again,  the  states  differ  considerably  in  regard  to  the 
liberality  of  the  charter.  Some  limit  the  amount  of  capital 
stock  that  may  be  issued,  some  require  that  the  directoi's' 
and  stockholders'  meetings  shall  be  held  within  the  state 
from  which  the  corporation  has  its  charter,  some  require 
that  the  capital  stock  shall  be  paid  for  in  money,  and  some 
forbid  corporations  from  o^^Tiing  shares  of  stocks  in  other 
coi-porations.  Accordingly,  if  a  coi^poration  desires  to  issue 
$25,000,000  worth  of  stock,  it  could  not  take  out  a  New 
Hampshire  charier,  where  the  amount  of  authorized  capital 
is  limited  to  $5,000,000.  Tf  it  wished  to  hold  a  stockholders' 
meeting  outside  of  the  state,  it  could  not  take  out  a  New 
Jersey  charter.    If  it  desired  to  hold  stock  in  other  corpo- 


60  MAURICE  H.  ROBINSON 

rations,  it  could  not  take  out  an  Illinois  charter.  The  pro- 
moters, therefore,  after  determining  upon  the  character  of 
the  enterprise,  select  the  state,  having  regard  to  the  various 
points  mentioned,  choosing  that  which  they  consider  most 
favorable  to  the  corporation  which  they  are  forming.  At 
the  present  time,  New  Jersey,  Maine,  Delaware,  Arizona, 
Nevada  and  South  Dakota,  and  several  other  states,  are 
called  the  leading  charter-granting  states  on  account  of  the 
lower  fees  and  the  more  liberal  terms  granted  to  incorpo- 
rators. 

In  some  cases  corporations  take  out  charters  in  several 
states,  for  example,  railways  operating  lines  in  adjoining 
states.  Such  charters  are  usually  identical  in  terms,  so  far 
as  practicable,  and  have  the  same  stockholders  and  the 
same  officers.  On  account  of  their  practical  identity  it 
has  become  a  fairly  well-settled  principle  of  law  to  regard 
such  corporations  as  a  single  corporation. 

The  Process  of  Formation. 

Each  state  prescribes  a  routine  method  which  must  be 
followed  under  its  corporation  law,  by  those  who  desire 
lo  take  out  a  charter.  The  process  is  in  its  general  details 
quite  similar,  but  differs  in  certain  particulars.  For  pur- 
poses of  illustration  the  routine  prescribed  by  the  states  of 
Illinois  and  New  Jersey  have  been  selected  and  are  given 
below. 

The  general  corporation  act  of  Illinois  provides  that 
any  number  of  persons,  from  three  to  seven  inclusive,  de- 
siring to  form  a  corporation,  may  file  a  statement  with  the 
secretary  of  state,  giving  the  name  of  the  proposed  corpo- 
ration, the  objects  for  which  it  is  formed,  the  amount  of 
the  capital  stock,  the  number  of  shares  and  the  value  of 
each,  its  principal  office  and  the  period  for  which  it  is  to 
be  formed,  not  to  exceed  ninety-nine  years.  The  statement 
above  described  must  be  signed  by  each  incorporator  and 
acknowledged  before  some  ofl&cer  authorized  to  acknowl- 


MODERN  BUSINESS  ORGANIZATION  61 

edge  deeds.  This  statement  is  then  sent  to  the  secretary 
of  state  and,  if  the  purpose  for  wliich  it  is  proposed  to  form 
tlie  corporation  is  lawful,  the  said  officer  issues  a  pennit 
authorizing  the  incorporators  to  act  as  commissioners  to 
open  books  for  the  purpose  of  securing  subscriptions  to 
the  capital  stock. 

After  being  properly  authorized,  the  commissioners 
open  the  books  to  secure  subscriptions  for  the  full  amount 
proposed  in  the  original  statement.  When  the  full  amount 
is  subscribed,  the  commissioners  call  a  meeting,  giving 
the  proper  notice,  for  the  organization  of  the  corpo- 
ration and  the  election  of  officers.  The  officers  then  col- 
lect at  least  one-half  of  the  total  amount  subscribed,  and 
make  a  full  report  of  the  meeting,  giving  the  subscription 
list,  the  amount  paid  in  upon  the  same,  whether  any  of 
the  capital  stock  has  been  paid  for  in  property  and  if  so 
the  fair  cash  value  of  the  property,  and  the  names  of  the 
directors.  This  report  must  be  signed  by  a  majority  of 
the  commissioners  and  filed  in  the  office  of  the  secretary 
of  state.  The  secretary  of  state  then  issues  the  charter 
which  upon  its  receipt  is  filed  in  the  office  of  the  recorder 
of  deeds  of  the  county  in  which  the  chief  office  of  the  corpo- 
ration is  located.  The  company  then  is  legally  organized 
and  must  proceed  to  business  within  tw^o  years  from  the 
date  when  its  charter  is  issued  or  the  charter  will  be  legally 
forfeited. 

As  compared  with  the  Illinois  method,  that  prescribed 
by  the  State  of  New  Jersey  in  the  general  corporation  act 
is  exceedingly  simple.  Under  the  New  Jersey  law,  three 
or  more  natural  persons  may  draw  up  an  agreement  for  the 
purpose  of  forming  a  corporation  under  the  general  corpo- 
ration act,  specifying  the  name,  the  objects  for  which  it 
is  formed,  the  amount  of  stock,  and  the  period  for  which 
it  is  formed.  They  may  then  secure  subscriptions  to  the 
full  amount  of  the  capital  stock,  requiring  each  subscriber 
to  sign  his  name  showing  the  amount  for  which  he  sub- 


62  MAURICE  H.  ROBINSON 

scribes  and  liis  post-office  address.  The  charter  as  drawn 
up,  with  its  subscribers,  must  then  be  approved  in  the  same 
manner  as  is  required  by  law  in  the  case  of  deeds  for  the 
transfer  of  real  estate.  It  is  then  recorded  in  the  office  of 
the  clerk  of  the  county  where  the  principal  office  of  the 
corporation  is  located,  and  finally  is  filed  with  the  secretary 
of  state,  when  its  legal  existence  begins. 

The  Capitalization. 

It  will  be  noticed  that  in  each  case  the  capitalization 
must  be  determined  before  the  corporation  enters  upon  its 
legal  existence.  By  capitalization  is  meant  all  stocks  and 
bonds  issued,  or  in  a  more  limited  sense  of  the  word,  the 
total  amount  of  stock  authorized.  The  capitalization  may 
be  equal  to  the  amount  of  assets  which  the  corporation 
possesses,  or  it  may  be  greater  or  less  than  the  assets. 
When  the  stocks  and  bonds  issued  by  the  corporation  are 
sold  at  par,  the  amount  of  capitalization  will  be  equal  to 
the  amount  of  assets;  if  they  are  sold  above  par,  the  assets 
will  exceed  the  capitalization;  and  if  either  one  or  both 
are  sold  at  less  than  par,  the  capitalization  will  exceed  the 
assets  and  the  stock  is  said  to  be  watered  or  the  corpora- 
tion over-capitalized. 

Having  determined  upon  the  operation  of  a  particular 
kind  of  business,  the  promoters  are  in  a  position  to  decide 
the  amount  of  assets  which  are  necessary  in  order  to  prop- 
erly carry  on  the  business.  Suppose,  for  example,  it  has 
been  decided  to  engage  in  the  manufacture  of  pianos.  The 
promoters  ask  how  much  capital  is  required  to  manufac- 
ture pianos  at  a  low  cost  at  the  point  where  the  factory  is  to 
be  located.  If  they  find  themselves  unable  to  raise  the 
amount  of  capital  necessary  to  imdertake  such  a  business 
in  the  proper  way,  then  their  project  should  be  abandoned 
or  the  corporation  should  devote  itself  to  some  other  busi- 
ness enterprise  requiring  a  smaller  amount  of  capital.  On 
the  other  hand,  it  is  possible  to  extend  the  field  from  which 


MODERN  BUSINESS  ORGANIZATION  63 

subscribers  are  originally  selected  and  thus  secure  a  larger 
amount  of  capital  by  appealing  to  a  larger  constituency. 

Assuming  that  the  enterprise  has  been  selected  and  that 
the  promoters  find  themselves  able  to  raise  the  necessary 
amount  of  capital,  they  must  then  decide  how  much  of  this 
capital  should  be  in  the  form  of  bonds  and  how  much  in 
the  fonn  of  stock.  The  bondholder  is,  from  the  broader 
point  of  view,  a  member  of  the  corporation  who  has  relin- 
quished any  right  which  he  might  have  had  in  directing 
the  management  of  the  enterprise,  for  the  sake  of  having 
his  property  secured  bj"  a  first  claim  upon  the  assets.  He 
receives  a  lower  rate  of  return  as  compensation  for  the 
security  he  receives.  Since  many  investors  desire  safety 
above  everything  else,  and  are  not  in  a  position  to  take  part 
in  the  management,  a  considerable  portion  of  the  capital 
of  ever^"  business  enterprise  is  borrowed,  and  under  the 
cori)orate  form  of  organization  those  who  subscribe  in  this 
way  hold  bonds  as  evidence  of  their  contributions.  If 
bonds  are  issued  above  the  value  of  the  property  at  a  forced 
sale,  under  the  most  unfavorable  conditions,  it  is  usually 
Impossible  to  sell  them  at  their  face  value  unless  the  rate 
of  interest  is  made  unduly  high.  Consequently  those  form- 
ing the  corporation  find  it  desirable  to  borrow  only  a  lim- 
ited portion  of  the  capital  upon  bonds,  and  make  the  rate 
of  interest  fairly  low. 

Having  determined  the  amount  that  may  be  raised  by 
the  issue  of  bonds,  all  the  remaining  capital  must  neces- 
sarily be  subscribed  by  the  stockholders.  In  the  issuing 
of  stock,  the  simplest  method  is  to  issue  one  kind  only, 
which  is  then  called  common  stock.  Since  the  stock  is  all 
alike,  there  is  no  opportunity  for  discrimination  among 
classes  of  stockholders;  all  have  the  same  rights,  all  take 
the  same  risks,  and  all  share  the  losses  and  the  profits 
equally.  By  subtracting  the  amount  received  from  the 
bond  issue  from  the  total  amount  of  capital  necessary  for 
the  proper  operation  of  the  business,  the  amount  which 


64  MAURICE  H.  ROBINSON 

must  be  secured  through  subscriptions  to  the  capital  stock 
is  determined.  By  dividing  this  amount  into  shares  of  a 
certain  amount,  for  example,  $100,  the  number  of  shares 
may  be  calculated  and  if  the  stock  is  sold  at  par,  when  all 
the  stock  is  subscribed  for  and  the  subscriptions  collected, 
the  corporation  will  be  in  possession  of  that  amount  of 
capital  which  the  promoters  consider  necessary  for  the  par- 
ticular business  which  it  is  to  undertake. 

In  recent  years  the  practice  has  grown  up  of  dividing 
the  stock  into  two  classes  called  common  and  preferred. 
Preferred  stock  has  a  superior  claim  to  the  dividends  or  to 
the  assets  of  a  corporation  in  case  of  dissolution  or  death, 
as  may  be  provided  in  the  charter  or  by-laws.  Preferred 
stock  is  thus  an  intermediate  security  between  bonds  and 
common  stock.  It  is  usually  granted  dividends  up  to  a 
certain  rate,  as,  for  example,  seven  per  cent.  If  the  corpo- 
ration earns  seven  per  cent  only  upon  the  preferred  stock 
in  excess  of  the  bond  interest,  then  the  holders  of  the  pre- 
ferred stock  may  receive  the  full  amount  of  their  dividends. 
In  such  a  case,  however,  the  common  stockholders  would 
receive  no  dividends  at  all.  Preferred  stock  may  be  either 
cumulative  or  non-cumulative.  Wherever  preferred  stock 
is  made  cumulative,  all  the  dividends  up  to  a  specified  rate 
become  a  preferred  charge  upon  the  earnings  and  accumu- 
late from  year  to  year,  in  case  they  are  not  paid,  to  the 
credit  of  the  preferred  stockholders.  Hence  if  a  corpora- 
tion is  unable  to  earn  the  rate  specified  on  the  preferred 
stock,  through  a  period  of  several  years,  and  then,  owing 
to  improved  conditions,  increases  its  earning  power  suffi- 
ciently to  pay  both  the  preferred  dividends  and  declare 
a  substantial  dividend  on  the  common  stock,  the  excess 
earnings,  after  the  preferred  dividend  is  paid,  must  go  to 
make  up  the  dividends  due  the  preferred  stock  in  past  years 
and  which  have  been  withheld  owing  to  a  lack  of  earnings. 
Preferred  stock  is  also  issued  having  the  right  to  share 
the  profits  with  the  common  stock.    In  such  cases  it  is 


MODERN  BUSINESS  ORGANIZATION  65 

usual  to  provide  that  the  prot'crrod  stock  shall  1)0  out  it  led 
to  a  certain  rate,  usually  seven  per  cent;  then  out  of  the 
excess  eaniings  the  common  stock  shall  he  entitled  to  a  sim- 
ilar amoimt,  and  the  two  classes  of  stock  shall  then  share 
equally  in  the  excess  profits. 

Preferred  stock  is  sometimes  issued,  in  which  the  hold- 
ers have  the  right  to  elect  a  majority  of  the  directors,  while 
the  common  stockholders  elect  the  minority.  In  such  cases 
the  real  control  of  the  corporation  is  hy  its  charter  en- 
trusted to  the  preferred  stockholders,  permitting  the  com- 
mon stockholders,  however,  a  minority  representation  upon 
the  board.  Ordinarily  preferred  stockholders  have  one 
vote  for  one  share,  in  common  with  all  shareholders.  Some- 
times, however,  preferred  stockholders  have  no  voting 
rights  so  long  as  the  dividends  specified  in  their  stock  are 
regularly  paid;  but  if,  for  any  reason,  the  directors,  repre- 
senting the  common  stock,  are  unable  to  pay  such  divi- 
dends, then  automatically  the  election  of  directors  passes 
over  into  the  hands  of  the  preferred  stockholders  and  re- 
mains in  their  power  until  the  dividends  upon  the  pre- 
ferred stock  have  been  paid  regularly  for  the  period  of 
time  specified  in  the  charter. 

Preferred  stock  is  sometimes  further  divided  into  class- 
es, as,  for  example,  first  preferred  and  second  j^referrod. 
In  such  cases  the  first  preferred  have  prior  rights  over 
the  second  preferred  and  usually  are  granted  a  lower  rate 
of  dividends,  on  account  of  the  fact  that  they  have  the  first 
right  to  dividends  and  the  first  right  to  a  share  in  the  assets 
in  case  the  corporation  is  dissolved. 

Tlius  where  a  corporation  is  organized  with  bonds  and 
two  classes  of  preferred  stock,  the  security  holders  are 
divided  into  four  classes,  each  having  its  own  special  rights 
and  privileges,  as  provided  in  the  chni'ter  and  by-laws,  the 
bonds  taking  precedence  over  the  first  preferred  stock  in 
point  of  security,  b\it  ordinarily  having  no  rights  in  man- 
agement, the  common  stock  taking  precedence  over  all  the 

B— 11— B 


66  MAURICE  H.  ROBINSON 

other  securities  in  the  right  of  management,  but  coming 
after  all  the  others  in  its  right  to  share  in  the  earnings 
and  the  assets. 

Where  preferred  stock  is  issued  it  is  desirable  to  make 
the  bond  issue  relatively  small  and  thus  make  the  preferred 
stock  take  the  place  of  certain  of  the  bonds  of  a  less  de- 
sirable character,  giving  them  at  the  same  time  the  right 
to  vote  for  the  directors.  Preferred  stock  thus  resembles 
very  closely  the  income  bond  with  voting  power,  especially 
where  the  stock  possesses  cumulative  rights.  Under  any 
circumstances,  the  total  amount  of  preferred  stock,  plus 
the  bonds,  ought  not  to  exceed  the  value  of  the  tangible 
assets.  Consequently  the  larger  the  bond  issue,  the  less 
the  preferred  stock,  and  the  less  the  bond  issue  the  larger 
the  amount  of  preferred  stock  which  may  be  properly 
issued.  Under  such  circumstances  the  preferred  stock  be- 
comes a  high-class  security,  gi^^ng  a  fairly  large  rate  of 
earnings,  and  permitting  the  holders  to  take  part  in  the 
election  of  directors.  Such  securities  are,  however,  de- 
pendent upon  the  earning  power  of  the  corporation  for 
their  dividends,  and  therefore  must  always  partake  more 
or  less  of  the  speculative  characteristics. 

Wherever  bonds  and  preferred  stock  have  been  issued, 
the  common  stock  represents  a  contingent  interest  in  the 
corporation,  and  the  holders  of  such  securities  are  in  a  po- 
sition to  receive  all  of  the  profits  over  and  above  what  is 
necessary  to  pay  interest  on  the  bonds  and  the  specified 
rate  of  interest  upon  the  preferred  stock.  If,  then,  the 
earnings  of  the  corporation  be  small,  the  preferred  stock- 
holders are  unable  to  receive  their  full  rate  of  the  dividends 
and  in  certain  cases  may  receive  no  dividends  at  all.  If 
however  the  earnings  are  large,  the  preferred  stockholders 
can  receive  under  any  circumstances  only  the  specified  rate, 
and  all  the  excess  earnings  go  to  the  common  stockholders. 
Consequently  the  amount  of  common  stock  issued  is  not 
a  matter  of  great  economic  importance.    The  value  of  the 


MODERN  BUSINESS  ORGANIZATION  67 

common  stock  must,  of  course,  equal  the  total  assets  less 
the  amount  of  preferred  stock  plus  the  bonds.  This  is  best 
shown  by  the  following  balance  sheet : 

BALANCE  SHEET.  CORPORATION  A. 

Assets.  Liabilities. 

Plant,  machinery,  etc $10,000,000      Accounts    $  1,000,000 

Bonds    4,000,000 

Preferred  stock  3.000,000 

Common   stock    2.000,000 

$10,000,000  $10.000,(X)0 

The  $2,000,000,  which  is  the  value  of  the  common  stock, 
may  be  represented  either  by  20,000  shares  at  $100  each, 
or  by  2,000,000  shares  at  one  dollar  each.  To  represent 
the  $2,000,000  of  common  stock  it  is  also  possible  to  issue 
100,000  shares  and  call  each  share  w^orth  $100.  In  such 
a  case  the  par  value  of  the  stock  w^ould  be  $100.  Its  value, 
however,  determined  from  the  assets,  is  only  $20  per  share, 
and,  in  a  market  where  values  were  properly  adjusted,  it 
would  be  selling  at  about  that  figure.  This  process  of  in- 
flating the  common  stock  issue  may  have  any  one  or  all  of 
the  following  results:  First,  it  may  deceive  prospective 
purchasers  as  to  the  real  value  of  the  property.  In  dra^^'ing 
up  a  balance  sheet  it  is  unusual  to  disclose  the  real  facts  and 
place  the  common  stock  at  $20  per  share.  The  common 
practice  is  to  list  the  common  stock  at  its  full  value  and  in- 
flate the  asset  account  by  a  fictitious  entry  in  order  to  make 
the  accounts  balance.  This  is  represented  in  the  following 
balance  sheet: 

BALANCE  SHEET.  CORPORATION  B. 

Assets.  Liabilities. 

Plant,   machinery    $10,000,000      Accounts    $1,000,000 

Good-will     8,000,000       Bonds   4,000.000 

Preferred  stock 3,000.000 

Common       stock       (100,000 

shares  @  $100)    10.000.000 

$18,000,000  $is.noo.ooo 

r  :  ■ 

Instead  of  inserting  the  amount  under  its  own  title  as 
above,  imder  the  heading  of  '*Grood-Will,"  it  is  also  common 


68  MAURICE  H.  ROBINSON 

to  include  the  amount  with  the  plant  and  machinery  and 
call  the  whole,  "Plant,  machinery,  etc.,"  as  shown  in  the 
following: 

BALANCE  SHEET.  CORPORATION  C. 

Assets.  Liabilities. 

plant,  machinery,  etc $18,000,000       Accounts    $  1,000,000 

Bonds    4.000,000 

Preferred    stock    3,000,000 

Common      stock       (100,000 

shares  @  $100)    10,000,000 

$18,000,000  $18,000,000 

The  proper  method  of  stating  the  condition  is  to  show 
the  stock,  bonds,  etc.,  at  their  full  value,  and  list  all  the 
assets  at  their  real  valuation,  and  if  the  assets  are  less  than 
the  liabilities,  insert  the  amount  under  the  title  of  "De- 
ficit" showing  the  exact  status.  This  is  shown  in  the  fol- 
lowing: 

BALANCE  SHEET.  CORPORATION  D. 

Assets.  Liabilities. 

Plant,  machinery   $10,000,000      Accounts    $1,000,000 

Deficit    8,000,000       Bonds    4,000,000 

Preferred  stock 3,000,000 

Common       stock       (100,000 

shares  @  $100)    10,000,000 

$18,000,000  $18,000,000 

If  the  assets  exceed  the  liabilities,  then  there  is  a  sur- 
plus which  belongs  to  the  stockholders  and,  under  ordin- 
ary circumstances,  to  the  common  stockholders.  This 
condition  is  shown  in  the  following: 

BALANCE  SHEET.  CORPORATION  E. 

Assets.  Liabilities. 

Plant,  machinery   $10,000,000      Accounts    $1,000,000 

Bonds    4,000,000 

Preferred  stock 3.000,000 

Common        stock        (10,000 

shares    @    $100) 1,000,000 

Surplus  1,000,000 

$10,000,000  $10,000,000 

t  ' 

It  will  be  seen  from  the  above  that  while  the  par  value 
of  the  stock  issued  has  no  effect  upon  the  assets  of  the  com- 


MODERN  BUSINESS  ORGANIZATION  69 

pany,  and  therefore  none  upon  the  real  value  of  the  stock, 
it  is  likely  that  the  issiiinj:^  of  stook  in  excess  of  the  assets 
may  lead  directors  to  adopt  the  policy  of  inflating  the  as- 
sets and  thus  deceive  prospective  investors  ^vho  have  no 
means  of  knowing  the  real  condition  of  affairs  and  unwise- 
ly estimate  the  value  of  the  stock  from  the  reports  of  the 
company. 

In  the  second  place,  those  in  active  charge  of  the  ac- 
counts of  the  corporation  may  deceive  the  other  stockhold- 
ers of  the  company  in  exactly  the  same  way.  Those  in 
actual  control,  however,  knowing  the  true  condition  of  af- 
fairs, are  in  a  position  to  take  advantage  of  the  deception 
practiced  upon  the  other  stockholders,  and  thus  by  the  pur- 
chase and  sale  of  stock,  add  to  their  o^^^l  income  at  the  ex- 
pense of  their  fellow  members  within  the  corporation. 

In  the  third  place,  the  corporation  is  founded  upon  the 
theor}^  that  each  share  of  stock  has  been  paid  fur  in  full  in 
cash  or  its  equivalent.  Consequently  if  the  corporation 
has  been  properly  organized,  each  share  of  stock  as  deliv- 
ered has  behind  it  its  full  value  in  real  ]~>roperty.  Upon  this 
theoiy  the  principle  of  limited  liability  is  founded  and 
justified.  Each  stockholder  may  lose  all  of  his  invest- 
ment, but  may  not  be  called  upon  to  contribute  anything 
in  addition  to  satisfy  the  claims  of  creditors.  Where  stock 
has  been  purchased  at  a  discount,  obviously  the  assets  are 
less  than  the  face  value  of  the  stock,  and  in  case  of  bank- 
ruptcy, the  creditors,  not  having  the  right  to  demand  satis- 
faction from  the  individual  stockholders,  nuist  rely  upon 
the  real  assets  of  the  company.  AMiere  the  assets  are  less 
than  appears  from  their  face,  the  creditors  in  many  cases 
receive  only  a  small  percentage  of  the  face  value  of  their 
claims.  Under  such  circumstances,  when  a  corporation 
becomes  bankrupt,  as  corporations  sometimes  do,  the  courts 
have  held  that  those  stockholders  who  have  not  paid  in 
full  for  their  stock  must  do  so  in  order  to  satisfy  the  claims 
of  the  creditors;  that  is,  they  must  pay  up  the  balance  upon 


70  MAURICE  H.  ROBINSON 

their  stock,  making  it  in  reality  full  paid.  Stock  is  ordina- 
rily issued  as  full  paid  and  non-assessable.  Such  stock  is 
often  sold  at  one-quarter,  or  even  a  less  part,  of  its  face 
value.  Under  such  circumstances,  the  majority  of  the 
stockholdei's  cannot  by  vote  assess  the  stock  in  the  corpo- 
ration. Where  a  corporation  becomes  bankrupt,  however, 
and  it  is  found  that  the  stock  was  Avholly  or  partially 
given  away,  it  is  entirely  proper  that  the  courts  should 
assess  the  stockholders  for  their  unpaid  portion  of  the 
stock.  Under  such  circumstances  the  liability  of  the 
stockholder  is  limited  to  the  face  value  of  his  stock;  but  on 
the  other  hand,  it  is  equal  to  the  face  value  of  the  same. 
The  method  which  has  been  practiced  so  much  in  the  last 
few  years,  of  giving  the  common  stock  as  a  bonus  with  the 
issues  of  preferred  stock,  has  tended  to  make  the  prin- 
ciple of  limited  liability  a  means  by  which  honest  creditors 
have  been  cheated  out  of  their  rights. 

The  Charter. 

In  choosing  a  state  under  which  the  corporation  is 
formed,  the  promoters  at  the  same  time  determine  the 
fundamental  legal  conditions  under  which  the  corpora- 
tion is  to  operate.  The  general  corporation  act  in  each 
state,  and  in  some  cases  the  state  constitutions,  not  only 
formulate  the  more  important  of  these  conditions,  but  un- 
iversally require  the  incorporators  to  draw  up  and  adopt  a 
formal  instrument  under  which  the  incorporators  unite  to 
form  the  corporation.  Such  an  instrument  is  called  the 
charter  or  certificate  of  incorporation,  or  sometimes  the 
articles  of  incorporation. 

The  charter  is  therefore  usually  drawn  up  by  the  ori- 
ginal promoters  and  at  the  proper  time  presented  to  the 
proper  authorities  for  their  approval.  Wherever  charters 
are  granted  by  the  special  act  of  some  legislature  they  are 
likely  to  be  more  extensive  and  more  specific.  Wherever 
they  are  taken  out  under  a  general  corporation  act,  they  are 


MODERN  BUSINESS  ORGANIZATION  71 

often  comparative!}^  brief,  since  the  corporation  law  out- 
lines many  conditions  that  would  otherwise  be  provided  for 
in  the  charter.  In  all  cases  they  include  a  brief  statement 
at  least  on  the  following  points: 

1.  Name  of  the  corporation. 

2.  Objects  or  purposes  for  which  it  is  organized. 

?y.  Amount  of  capital  stock,  classes  into  which  it  is 
divided  and  the  rights  of  each  class. 

4.  The  number  of  shares  into  which  the  capital  stock 
is  divided  and  the  par  value  of  each. 

5.  The  location  of  its  principal  office. 

6.  The  tenn  for  which  it  is  fonned,  either  for  a  period 
of  years  or  in  perpetuity. 

7.  The  names  and  post-office  addresses  of  the  incorpo- 
rators. 

Name  of  the  Corporation. 

Tlie  choice  of  a  name  for  the  corporation  is  left  to  the 
incorporators  with  one  condition,  namely,  that  they  may  not 
select  a  name  already  in  use  by  a  corporation  of  the  same 
state  already  in  existence. 

It  is  desirable  to  select  a  name  that  indicates  the  nature 
of  the  business  which  the  corporation  is  to  undertake,  as 

The Motor  Car  Company,  The 

Carbide  Company.  In  some  cases  the  title  is  chosen  to  per- 
petuate the  name  of  some  man  who  has  become  distinguish- 
ed for  his  technical  or  business  ability,  as  the  Westing- 
house  Manufacturing  Company.  In  other  cases  the  name 
is  chosen  to  continue  the  name  of  a  partnership  which  has 
been  converted  into  a  corporation,  as  the  Thompson-Hous- 
ton Company.  In  all  cases,  since  the  name  may  become  an 
asset  of  importance  as  the  reputation  of  the  corporation  be- 
comes established,  it  is  desirable  to  select  one  that  is  short 
and  that  is  likely  to  call  the  attention  of  those  who  see  it  to 
the  business  which  the  corporation  is  carrying  on. 


72  MAURICE  H.  ROBINSON 

The  Object  or  Purpose  of  The  Corporation. 

While  the  individual  and  the  partnership  may  in  gen- 
eral undertake  anv  business  not  forbidden  by  law,  the  cor- 
poration is  required  to  name  the  objects  for  which  it  is 
formed,  and  confine  itself  rather  narrowly  to  the  objects  or 
purposes  specified  in  its  charter.  Hence  it  is  necessary  to 
state  such  objects  at  considerable  length.  When,  however, 
the  business  to  be  undertaken  is  fairly  limited  in  its  char- 
acter, the  object  clause  may  be  comparatively  brief,  as,  for 
example,  the  following,  which  is  a  good  illustration  of  the 
object  clause  of  a  manufacturing  company  formed  for  the 
purpose  of  making  a  particular  line  of  machinery:  **The 
purposes  for  which  said  corporation  is  formed  are  as  fol- 
lows:— 

1.  To  buy,  sell,  manufacture  and  generally  deal 
in  all  manner  of  tools,  machinery,  devices,  appli- 
ances and  supplies  used  in  the  cooper's  trade. 

2.  To  lease,  buy,  sell,  use  and  hold  all  such  prop- 
erty, real  or  personal,  as  may  be  necessary  or  con- 
venient in  connection  with  the  said  business. 

3.  To  do  any  or  all  things  set  forth  in  this  certi- 
ficate as  objects,  purposes,  powers  or  otherwise,  to 
the  same  extent  and  as  fully  as  natural  persons 
might  do,  and  in  any  part  of  the  world."* 

In  cases  where  the  business  to  be  conducted  is  exten- 
sive, it  is  desirable  to  include  in  the  purposes  for  which 
the  corporation  is  formed  a  clause  sufficiently  broad  so  that 
the  legitimate  activities  of  the  corporation  may  not  be  un- 
duly hampered.  For  example,  the  United  States  Steel 
Corporation  is  engaged  in  practically  all  kinds  of  manu- 
facturing connected  with  the  iron  and  steel  industry.  In 
order  that  it  might  be  authorized  to  properly  conduct  its 
business,  the  object  clause  in  its  charter  contains  eleven 
paragraphs,  each  of  which  is  a  grant  of  extensive  powers 
in  itself.    At  the  end  of  the  last  clause,  for  fear  some  of  its 

♦Conjmgton:    Corporation  Management,  p.  170. 


MODERN  BUSINESS  ORGANIZATION  73 

proposed  activities  mi^lit  be  prevented  for  lack  of  author- 
ity, the  following  parai^rraph  is  added:  "To  do  any  and  all 
other  acts  and  things  and  to  exercise  any  and  all  other 
powers  which  a  copartnership  or  natural  person  could  do 
and  exercise  and  which  now  or  hereafter  may  be  authorized 
by  law."t 

The  Capital  Stock. 

The  provisions  in  regard  to  the  capital  stock  may  ])e 
exceedingly  brief,  or  they  may  be  treated  at  consid- 
erable length  in  the  charter.  In  the  former  case  the 
detailed  specifications  are  reserved  for  the  by-laws. 
Where  a  corporation  is  essentially  private  in  its  na- 
ture, that  is,  where  practically  all  its  stockholders  are 
directly  interested  in  its  management,  it  is  proper  to 
make  the  clause  relating  to  the  capital  stock  brief, 
specifying  merely  the  amount  authorized,  the  number 
of  shares,  and  the  par  value  of  each.  In  cases  where  the 
corporation  is  composed  of  a  large  number  of  widely 
scattered  stockholders,  the  clauses  relating  to  the  capital 
stock  should  be  full  and  explicit.  That  of  the  United 
States  Steel  Corporation,  for  example,  not  only  includes 
all  of  the  usual  provisions,  but  contains  elaborate  regula- 
tions in  regard  to  the  payment  of  dividends,  and  the  distri- 
bution of  the  assets  in  case  the  corporation  is  dissolved. 
The  chief  object  in  stating  the  rights  of  the  stockholders  in 
the  charter  rather  than  in  the  by-law^s  is  to  prevent  the  ma- 
jority interests  from  unduly  interfering  with  the  rights 
of  tlie  minority.  It  is  usual  to  provide  that  the  chart(T 
may  be  amended  only  with  the  consent  of  a  two-thirds  or  a 
three-fourths  majority,  whereas  the  by-laws  can  ordinarily 
be  altered  by  a  bare  majority  and  sometimes  even  by  a  vote 
of  the  directors.  Consequently  the  rights  formulated  in 
the  charter  are  likely  to  be  less  easily  changed  and  thus 
more  pennanent. 

t  Charter  of  U.  S.  Steel  Corp.,  Section  III. 


74  MAURICE  H.  ROBINSON 

Other  Essential  Features. 

The  location  of  the  principal  offices  and  the  names  and 
addresses  of  the  incorporators  are  required  by  the  statute 
law  quite  generally  in  order  that  processes  may  be  served 
and  that  those  responsible  for  the  promotion  of  the  enter- 
prise may  be  held  accountable  to  the  proper  state  officers 
for  any  breach  of  the  law.  The  location  of  the  principal 
office  does  not  necessarily  mean  the  chief  operating  office. 
Jersey  City,  for  example,  contains  the  domicile  of  a  large 
number  of  New  Jersey  corporations  whose  principal  places 
of  manufacturing  are  in  Pittsbm'g  and  Chicago,  and  the  in- 
corporators may  be,  and  often  are,  succeeded  by  the  real 
power  behind  the  throne,  as  in  the  case  of  the  United  States 
Shipbuilding  Company,  as  soon  as  the  preliminary  stages 
in  the  organization  are  concluded.  Some  states  permit  cor- 
porations to  be  incorporated  in  perpetuity;  others  for  a 
limited  term  only.  In  the  latter  case  provision  is  usually 
made  in  the  corporation  act  for  a  continuation  of  the  cor- 
porate existence  of  the  enterprise  at  the  expiration  of  the 
term  for  which  it  is  formed,  by  some  formal  action  on  the 
part  of  the  stockholders. 

In  the  celebrated  case  of  Dartmouth  College  v.  the 
State  of  New  Hampshire,  decided  in  1818,  a  charter  was 
held  to  be  a  contract  between  the  state  granting  it  and  the 
incorporators  and  their  legal  sucessors.  Hence  a  charter 
granted  in  perpetuity  cannot  be  terminated  by  action  of 
the  state.  Accordingly  certain  charters  granted  in  the 
early  part  of  the  last  century,  possessing  wide  powers  of 
doing  business,  have  become  exceedingly  valuable,  and 
some  of  these  have  been  obtained  and  used  for  purposes 
quite  different  from  those  for  which  they  were  originally 
obtained.  As  a  result  of  the  decision  of  the  Supreme  Court 
in  the  Dartmouth  College  case,  legislatures  of  the  various 
states  in  gi-anting  special  charters  and  in  their  laws  for  the 
incorporation  of  companies  under  general  acts,  have  quite 


MODERN  BUSINESS  ORGANIZATION  75 

generally  provided  that  such  charters  may  be  terminated 
by  the  leirislatiires  whenever  in  the  opinion  of  sneh  author- 
ity the  public  interests  seem  to  make  such  action  desirable. 

In  addition  to  the  above  clauses  which  are  called  the 
essential  features  of  a  corporate  charter,  it  is  common  in 
the  larger  corporations  to  insert  paragraphs  regulating,  and 
sometimes  limiting,  the  powers  of  the  directorate.  It  is, 
for  example,  not  unusual  to  specify  the  number  of  directors 
and  to  provide  for  their  classification  into  groups,  each 
group  serving  for  a  period  of  years.  To  regulate  the 
method  of  electing  officers,  of  filling  vacancies,  to  authorize 
the  appointment  of  committees  and  fix  their  duties,  to  al- 
low the  directors  to  fix  the  working  capital  and  to  use  the 
earnings  in  declaring  dividends  or  for  improving  the  prop- 
erty, as  their  judgment  directs.  To  authorize  the  corpo- 
ration to  hold  stock  in  other  corporations,  and  to  require 
that  bonds  or  mortgages  constituting  a  prior  obligation 
upon  any  particular  class  of  securities  in  existence  must 
be  approved  by  a  specified  majority  of  the  votes  of  the 
various  classes  affected,  before  such  change  may  go  into  ef- 
fect. 

The  charter  thus  formulates  the  fundamental  principles 
upon  which  a  corporation  is  organized.  In  all  cases  it  is, 
however,  subordinate  to  the  corporation  law  of  the  state 
under  which  the  company  is  incorporated.  Its  provisions, 
therefore,  seiwe  to  carry  out  and  extend  the  provisions  of 
the  corporation  law  rather  than  to  limit  or  change  them. 

The  By-Laws. 

The  charter  is  expected  to  provide  for  those  features  in 
a  corporate  organization  which,  by  their  nature,  are  in- 
tended to  be  fairly  permanent.  It  is  therefore  formulated 
at  the  beginning  of  the  corporate  existence  of  the  enter- 
prise and  is  ordinarily  difficult  of  amendment. 

The  by-laws,  on  the  contrary,  are  desi.gned  to  provide 
the  regulations  under  which  the  corporation  is  managed. 


76  MAURICE  H.  ROBINSON 

The  charter  thus  may  be  compared  to  the  constitution  of  a 
state  while  the  by-laws  resemble  the  statute  law.  The 
by-laws,  therefore,  are  always  subordinate  to  the  charter 
provisions,  and  should  be  considered  as  a  supplement  to 
that  document.  If  the  charter  is  full  and  explicit  upon  any 
point,  that  topic  may  be  omitted  in  the  by-laws.  If  the 
charter  fails  to  make  provision  for  any  feature  essential 
to  the  proper  organization  and  conduct  of  the  corporation, 
such  feature  should  be  covered  by  the  by-laws.  In  general, 
the  by-laws  provide  fairly  specific  rules  and  regulations  in 
regard  to  the  following  subjects: 

1.  Stock. 

2.  The  stockholders. 

3.  The  directors. 

4.  The  officers. 

5.  The  dividends  and  finances. 

6.  The  amendments. 

1.    The  Stock. — It  is  usual  to  provide  in  the  by-laws 
that  certificates  of  stock  shall  be  issued  to  the  stockholders 
and  to  require  that  such  documents  be  signed  by  the  presi- 
dent and  treasurer,  and  sealed  by  the  secretary  with  the 
corporate  seal;  that  a  complete  record  of  the  issue  of  such 
certificates  shall  be  kept  and  that  transfers  of  stock  shall 
be  made  only  on  the  books  of  the  company;  that  old  certi- 
ficates must  be  surrendered  and  cancelled  before  new  ones 
are  issued  to  take  their  place.    It  is  also  usual  to  require 
the  stock  book  to  be  closed  for  a  short  period,  for  example, 
twenty  days,  before  the  general  elections  and  for  a  shorter 
period  before  dividend  days.    It  is  also  desirable  to  make 
provisions  concerning  treasury  stock  and  usually  directors 
are  forbidden  to  vote  or  pay  dividends  on  such  shares. 
The  object  of  the  stock  provisions  in  the  by-laws  is  to  en- 
able the  management  and  stockholders  to  know  who  holds 
the  various  shares  of  stock,  in  order  that  notices  of  meet- 
ings may  be  sent,  or  in  order  that  proposed  plans  of  corpo- 
rate policy  may  be  presented  to  them  before  the  meetings 


MODERN  BUSINESS  ORGANIZATION  77 

are  called;  to  prevent  I'radiilent  issue  of  certififates  and  to 
lessen  the  speculative  purchases  of  stock  just  before  divi- 
dend days;  and  finally,  to  make  it  difficult  to  control  the 
election  of  directors  by  purchasing  stock  immediately  be- 
fore election,  holding  it  for  purposes  of  voting  upon  it  dur- 
ing the  election,  and,  when  the  election  is  over,  selling  the 
same. 

2.  The  Stockholders. — The  time  and  place  of  the  an- 
nual meeting  is  always  provided  for  in  the  by-laws,  and 
it  is  also  customary  to  specify  that  a  notice  of  such  meet- 
ing shall  be  sent  by  the  secretary  to  each  member  a  suffi- 
cient tune  in  advance  to  give  all  stockholders  an  oppor- 
tunity to  attend  the  meeting  if  they  so  desire.  The  elec- 
tion of  directors  and  the  reports  of  officers  are  usually  re- 
quired at  the  annual  meeting.  It  is  usual  by  statute  law 
to  allow  voting  by  proxy;  wherever  such  is  not  the  case 
it  is  common  to  authorize  this  method  of  voting  in  the  by- 
laws. Special  meetings  of  the  stockholders  are  also  pro- 
vided for  under  this  section.  Such  meetings  may  be  called 
ordinarily  either  by  a  resolution  of  the  board  of  direct- 
ors, or  on  request  of  a  representative  number  of  the  stock- 
holders. In  addition  to  this  the  number  required  for  a 
quorum  is  stated,  and  the  order  of  business  which  is  fol- 
lowed in  the  various  meetings  is  outlined. 

3.  The  Directors. — The  coii^oration  law  of  all  the  states 
requires  that  the  business  of  the  corporation  shall  be  man- 
aged by  a  board  of  directors.  In  the  by-laws  the  number  of 
such  directors  is  fixed,  if  not  already  provided  for  in  the 
charter,  and  in  addition,  their  qualifications,  method  of 
election,  terai  of  office,  and  method  of  filling  vacancies  are 
stated.  It  is  also  customarj'  to  require  regular  meetings  of 
the  board  and  to  pro^-ide  for  special  meetings  whenever 
the  business  of  the  coi^joration  requires.  In  this  section 
the  quonun  is  stated  and  the  method  of  electing  officers  is 
given  in  detail.  In  the  larger  corporations  the  board  of 
directoi-s  is  authorized  to  appoint  various  committees  to 


78  MAURICE  H.  ROBINSON 

take  charge  of  the  business  of  the  board  while  the  board  is 
not  in  session.  For  example,  the  United  States  Steel  Cor- 
poration has  two  such  standing  committees — the  execu- 
tive committee  and  the  finance  committee.  These  com- 
mittees prepare  plans  for  the  consideration  of  the  full 
board,  and  oversee  the  execution  of  such  plans  after  they 
are  adopted.  The  committee  system  is  an  essential  fea- 
ture of  corporate  organization  for  those  corporations  hav- 
ing a  large  number  of  directors  and  for  those  where  the 
directors  live  at  a  considerable  distance  from  each  other. 

4.  The  Officers. — The  corporation  act  of  the  various 
states  generally  requires  that  the  following  officers  shall 
be  elected,  namely,  a  president,  a  secretary  and  a  treasur- 
er. It  is  usual  to  provide  that  such  officers  may  be  chosen 
by  the  directors  or  by  the  stockliolders,  as  the  by-laws  di- 
rect. The  president  must  ordinarily  be  a  director;  the  other 
officers  may  or  may  not  be  directors.  The  corporation  act 
also  provides  that  such  other  officers  may  be  chosen  as  the 
by-laws  specify.  Consequently  it  is  necessary  to  provide 
in  the  by-laws  for  the  complete  official  organization  of  the 
corporation,  to  determine  the  method  by  which  the  officers 
shall  be  elected,  and  to  give  an  outline  at  least  of  the 
duties  of  the  official  staff. 

In  addition  to  the  officers  which  are  required  by  law,  it 
is  common  in  the  larger  corporations  to  appoint  one  or 
more  vice-presidents,  a  general  manager,  and  a  chief  coun- 
sel. Where  one  vice-president  only  is  appointed,  such  of- 
ficer generally  acts  as  an  assistant  to  the  president.  Where 
several  are  appointed,  it  is  common  to  divide  the  work  of 
the  corporation  into  departments  and  give  each  vice-presi- 
dent general  supervision  over  one  of  these.  The  president 
in  such  cases  becomes  the  general  supervising  officer,  but 
without  specific  duties  in  any  department.  The  president 
as  the  name  signifies  is  ordinarily  the  chief  officer  of  both 
in  the  by-laws  are  to  preside  at  aU  the  meetings  of  both 
the  stockholders  and  the  directors.    His  duties  as  outlined 


MODERN  BUSINESS  ORGANIZATION  79 

these  organizations,  when  he  is  able  to  be  present.  lie  also 
is  generally  authorized  to  sign  all  stock  certificates,  all  im- 
portant contracts,  all  deeds,  and  such  other  papers  as  are 
deemed  of  sufficient  importance  to  need  the  approval  of 
the  chief  executive.  It  is  customaiy  also  to  provide  in  the 
by-laws  that  he  shall  make  a  complete  annual  report  to  the 
directors  and  present  the  same  at  the  annual  meeting  of  the 
stockholders.  He  is  usually  made,  ex-officio,  a  member  of 
all  important  committees,  and  is  ordinarily  the  chief  execu- 
tive officer  for  the  entire  corporation. 

Some  of  the  larger  corporations  have  introduced  a  new 
officer  called  the  chaiiman  of  the  board,  and  assign  to  him 
a  portion  of  the  president's  duties.  The  chairman  of  the 
board  presides  at  the  meetings  of  the  boards  of  directors, 
while  the  president  retains  his  former  place  as  presiding  of- 
ficer at  the  stockholders'  meetings.  The  chairman  thus 
takes  on  the  more  important  and  more  dignified  duties  of 
the  president,  and  as  a  matter  of  fact  is  usually  a  former 
president  who  has  been  relieved  of  certain  active  duties  of 
his  office  and  becomes  a  somewhat  ornamental  head  of  the 
corporation,  the  president  meanwhile  retaining  the  more 
active  duties  of  the  president's  office. 

The  secretaiy  is  one  of  the  necessary  officers  of  a 
corporation,  so  necessary  in  fact  that  the  corporation  laws 
of  the  several  states  require  the  appointment  of  such  an 
officer  and  specify  the  more  important  duties  that  he  is  to 
perfoiTn.  The  New  Jersey  law,  for  example,  provides  that 
*'the  secretaiy  shall  be  swoni  to  the  faithful  discharge  of 
his  duty,  he  shall  record  all  the  votes  of  the  corporation  and 
directors  in  a  book  to  be  kept  for  that  purpose,  and  perform 
such  other  duties  as  shall  be  assigned  to  him."  In  the  by- 
laws of  the  United  States  Steel  Corporation,  other  duties 
assigned  to  the  secretary'  are  as  follows:  He  is  required 
to  keep  the  minutes  of  the  meetings  of  the  board  of  direct- 
ors and  of  the  stockholders;  to  serve  all  notices  for  the  com- 
pany; to  sign  with  the  president  all  contracts  authorized  by 


80  MAURICE  H.  ROBINSON 

the  board  of  directors  or  the  finance  committee  and  to  affix 
the  seal  of  the  company  to  the  same ;  to  have  charge  of  the 
certificate  books  and  transfer  books,  the  stock  ledgers,  and 
such  other  books  as  the  directors  or  the  finance  committee 
may  direct,  and  keep  them  open  for  inspection  of  the  proper 
officers  during  business  hours;  and  in  general  to  perform 
the  duties  incident  to  his  office,  subject  to  the  control  of 
the  directors  and  the  finance  committee.  In  the  larger 
companies  the  secretary  has  one  or  more  assistants  whose 
duties  are  assigned  in  the  by-laws  or  determined  by  order 
of  the  board  of  directors. 

A  third  officer  generally  required  by  the  corporation 
act  in  all  of  the  states  is  the  treasurer.  In  the  New  Jersey 
code  the  only  provision  made  in  regard  to  this  officer  is  that 
a  treasurer  shall  be  chosen  and  that  he  shall  give  a  bond 
for  the  faithful  discharge  of  his  duties  in  such  sum  and  with 
such  surety  or  sureties  as  the  by-laws  may  require.  The 
by-laws  must  then  provide  for  the  treasurer's  bond,  and 
in  addition  it  is  usual  to  give  an  outline  of  his  more  impor- 
tant duties.  His  chief  function  of  course  is  to  have  over- 
sight of  all  the  moneys  and  securities  belonging  to  the  cor- 
poration. He  keeps  his  own  books  and,  in  some  eases,  he 
has  entire  charge  of  the  books  of  the  company.  Ordinarily 
certain  papers  and  documents  of  an  important  financial 
character  require  his  signature,  such,  for  example,  as  stock 
certificates,  bills  of  exchange,  promissory  notes,  receipts, 
vouchers  for  payments  made  to  the  company;  he  also  may 
be  authorized  to  sign  checks,  sometimes  alone  and 
sometimes  in  conjunction  with  another  officer  desig- 
nated for  this  purpose.  In  all  of  his  duties  it  is  usual  to 
prescribe  in  the  by-laws  that  he  shall  be  subject  to  the  con- 
trol of  the  board  of  directors,  and  shall  keep  his  books  and 
accounts  open  to  the  inspection  of  those  authorized  to  see 
the  same  during  business  hours.  Like  the  secretary  in  the 
larger  corporations,  he  has  one  or  more  assistant  treasurers 
acting  under  his  immediate  direction. 


MODERN  BUSINESS  ORGANIZATION  81 

Such  other  officers  are  provided  for  in  the  by-laws  as  the 
conditions  of  each  corporation  seem  to  wari-niit.  Tlio  two 
most  important  of  such  arc  the  general  counsel  and  the 
auditor.  The  general  counsel  is,  as  the  name  indicates,  the 
chief  legal  officer  of  the  corporation.  All  matters  concern- 
ing the  laws  under  which  the  corporation  is  organized  and 
conducted  are,  by  the  by-laws,  entrusted  to  his  immediate 
care.  In  the  case  of  railways  and  certain  large  business 
corporations  the  chief  counsel  is  assisted  by  a  staff  of  as- 
sistant solicitors. 

The  auditor  is  one  of  those  indispensable  officers  whose 
real  value  has  only  recently  been  recognized  in  business 
organization  and  management.  Hence,  until  recently,  all 
the  work  of  the  auditor  has  been  subdivided  among  the 
secretary,  the  treasurer,  and  the  head  bookkeeper.  Within 
the  last  quarter  of  a  century,  however,  the  complexity  of 
the  modem  business  organizations  has  made  necessary  not 
only  more  elaborate  accounts,  but  also  their  concentration 
in  a  general  office  especially  created  for  that  purpose,  con- 
trolling and  unifying  all  of  the  accounts.  Consequently  in 
many  of  the  more  complex  business  organizations  the  audi- 
tor is  provided  for  in  the  by-laws  and  his  duties  are  there 
specified.  Wherever  such  an  office  exists,  the  holder  of  it 
is  authorized  in  the  by-laws  to  take  charge  of  all  the  ac- 
counts of  the  company,  subject  of  course  to  the  general 
directions  of  the  board.  He  has,  of  course,  a  staff  of  assist- 
ants, whose  duties  are  arranged  by  the  directors,  sul)ject 
to  his  personal  direction. 

In  the  smaller  corporations,  the  president,  by  vii'tue  of 
his  office,  usually  occupies  the  position  of  general  manager. 
In  the.  medium  sized  ones,  it  is  common  to  delegate  a 
portion  of  his  duties  to  the  general  manager.  In  such  cases 
the  by-laws  give  the  latter  a  certain  indeiM^ndence  of  posi- 
tion by  specifying  that  he  shall,  under  the  supervision  of 
the  board  of  directors  and  the  president,  have  charge  of 
managing  the  active  business  operations  of  the  corporation. 

B— II— € 


82  MAURICE  H.  ROBINSON 

In  tlie  larger  companies,  however,  the  duties  of  the  gen- 
eral manager,  as  previously  stated,  are  usually  divided  up 
and  entrusted  to  several  officers  who  are  generally  desig- 
nated as  vice-presidents  in  charge  of  the  various  depart- 
ments created  by  order  of  the  board  of  directors. 

5.  Dividends  and  Finance. — The  distinguishing  char- 
acteristic of  the  business  corporation  as  compared  "\;\ith  a 
municipal  or  a  social  corporation,  is  that  it  exists  to  earn 
profits  and  to  declare  the  same  in  the  form  of  dividends. 
It  is  however  possible  to  declare  dividends  out  of  the  cap- 
ital assets  and  thus  unpair  the  future  earning  capacity  of 
the  corporation.  On  the  other  hand,  it  is  possible  to  de- 
clare no  dividends  at  all,  where  a  corporation  is  earning  a 
reasonable  rate  of  profit,  b}''  keeping  the  surplus  earnings 
and  reinvesting  the  same  in  the  property  or  in  other  in- 
dustrial undertakings.  Consequently  it  is  considered  de- 
sirable to  formulate  a  di^ddend  policy  for  the  organization 
in  some  of  the  formal  documents  connected  with  its  organi- 
zation. Foraierly  the  states  in  their  corporation  laws  ex- 
ercised very  little  supervision  over  the  matter  of  dividends 
of  a  corporation.  OA^dng  however  to  the  development  of 
certain  evils,  such,  for  example,  as  stock  speculation  by  the 
directors  or  wasting  the  assets  for  the  purpose  of  defraud- 
ing the  creditors,  it  is  common  to  provide  in  the  general  cor- 
poration act  that  dividends  may  be  paid  only  out  of  the 
earnings,  and  that  the  directors  shall  be  jointly  and  several- 
ly liable  for  dividends  paid  out  of  the  capital  assets.  On 
the  other  hand,  some  states  provide  that,  unless  otherwise 
authorized  by  the  majority  of  the  stockholders  in  the  ar- 
ticles of  incorporation  or  in  the  by-laws,  the  directors  must 
annually  declare  in  dividends  the  surplus  profits  over  and 
above  the  working  capital  fixed  by  vote  of  the  stockholders. 

It  is  therefore  required  in  some  cases  and  desirable  in 
all,  that  a  dividend  policy  within  the  limits  fixed  by  statute 
law  shall  be  definitely  formulated  and  stated  in  the  by- 
laws if  not  in  the  charter.    It  is  then  customary  to  specify 


MODERN  BUSINESS  ORGANIZATION  83 

that  dividends  shall  be  paid  only  out  of  the  surplus  profits 
of  the  corporation.  It  is  also  common  to  permit  the  di- 
rectors to  fix  the  amount  of  the  working  capital  and  in 
some  cases  to  determine  whether  the  earnings  shall 
be  declared  in  dividends  or  used  to  improve  the  property. 
In  the  ordinary  meaning  of  the  word,  dividends  include 
payments  in  money  only.  The  so-called  stock  dividends 
are  in  reality  an  increase  of  the  capital  stock  distributed  to 
the  stockholders  pro  rata  either  as  a  gift  or  at  less  than 
their  real  value.  Furthei-more,  it  is  customary  to  provide 
that  the  dividends  be  declared  annually  or  semi-annually, 
rather  than  at  times  chosen  in  any  haphazard  way. 

However,  it  is  difficult  to  arrange  for  all  of  the  above 
matters  in  advance  since  the  rate  of  earnings  must  always 
be  somewhat  uncertain  and  consequently  any  such  regula- 
tion in  the  by-laws  is  likely  to  be  an  expression  of  policy 
rather  than  a  fixed  rule. 

The  amount  of  working  capital  or  reserve  is  ordinarily 
fixed  by  the  dii-ectors.  Under  the  New  Jersey  law,  how- 
ever, express  authority  must  be  granted  them  in  the  charter 
or  by-laws  in  order  that  this  policy  may  be  legally  followed. 
By  varying  the  amount  of  the  working  capital,  it  will  be 
noticed,  the  surplus  available  for  dividends  can  be  controll- 
ed at  will.  Hence  the  requirement  in  the  by-laws  of  some 
companies  that  the  working  capital  shall  be  fixe'd  at  a 
certain  percentage  of  the  total  assets.  Under  such  cir- 
cumstances it  becomes  necessary  to  declare  the  remainder 
of  the  surplus  earnings  in  dividends  at  regular  periods. 

While  ordinarily  the  financial  affairs  of  a  corporation 
are  entirely  subject  to  the  control  of  the  board,  it  is  com- 
mon to  specify  that  the  cash  of  the  company  be  kept  in 
some  conseiwative  bank  and  that  all  pa^Tnents  on  behalf  of 
the  company  be  made  by  check,  duly  signed  by  the  proper 
officers,  usually  the  president  and  the  secretary.  It  is  also 
common  to  provide  in  this  fonnal  way  that  all  debts  con- 
tracted above  a  certain  specified  simi  shall  be  duly  author- 


84  MAURICE  H.  ROBINSON 

ized  by  a  majority  vote  of  the  board  of  directors.  The  ob- 
ject of  this  is  to  hold  the  directors  responsible  to  the  stock- 
holders whenever  they  unduly  increase  the  obligations  of 
the  company. 

6.  Amendments  to  the  By-Laws. — The  by-laws  should 
contain  a  clause  providing  for  their  own  amendment  under 
such  conditions  that  the  will  of  the  corporation,  expressed 
through  its  majority,  is  likely  to  be  effected.  In  Illinois, 
where  the  statute  provides  that  the  by-laws  shall  be  made 
and  amended  by  the  directors,  the  amendment  clause  in 
well-managed  corporations  contains  the  following  provi- 
sions :  That  proper  notice  of  a  proposed  amendment  must 
be  given  by  the  officers,  and  that  the  changes  proposed  shall 
go  into  effect  only  when  considered  by  the  board  at  some 
regular  meeting  and  approved  by  a  specified  majority.  In 
states  like  New  Jersey,  where  the  ultimate  control  over  the 
by-laws  is  entrusted  to  the  stockholders,  or  where  this 
power  may  by  the  charter  be  given  to  the  directors  subject 
to  final  alteration  by  the  stockholders,  the  amendment 
clause  should  state  the  conditions  under  which  the  directors 
may  exercise  their  power  of  amendment  and  the  methods  by 
which  the  stockholders  may  exercise  their  superior  right  to 
alter  or  veto  such  acts.  Where  the  right  is  retained  by  the 
stockholders,  the  method  of  amendment  should  be  given  at 
length,  and  should  provide  for  full  notice  of  the  amend- 
ments and  for  the  formal  approval  of  at  least  a  majority  of 
the  stockholders  at  a  regular  meeting,  or  a  meeting  called 
for  the  purpose  of  considering  the  amendment,  in  order 
that  such  amendments  be  made  a  part  of  the  rules  under 
which  the  corporation  operates. 

IV.    INTERNAL  ORGANIZATION  OF 
THE  CORPORATION. 

From  the  proprietary  point  of  view  the  corporation 
under  usual  conditions  is  made  up  of  two  grougs,  each  hav- 


MODERN  BUSINESS  ORGANIZATION  85 

ing  distinct  rights,  privileges  and  liabilities.     These  two 
groups  are  the  bondholders  and  the  stockholders. 

The  Bondholders. 

The  rights  of  the  bondholders  in  a  corporate  organiza- 
tion are  fixed  partly  by  statute  law,  and  partly  by  contract 
between  the  bondholders  and  the  stockholders  representing 
the  corporation.  In  the  simpler  cases,  the  bonds  issued  are 
all  of  one  class,  and  consequently  the  bondholders  enjoy 
equal  rights  and  privileges.  As  a  result,  however,  of  the 
rapid  growth  of  corporate  enterprises,  those  companies 
which  originally  started  with  a  simple  bond  issue  usually 
have  found  it  desirable,  in  the  course  of  time,  to  issue  addi- 
tional bonds.  Instead  of  paying  up  the  outstanding  obliga- 
tions and  issuing  new  ones  in  their  places,  it  is  found  more 
convenient  to  allow  the  bonds  already  issued  to  remain 
until  the  expiration  of  their  period,  and  add  a  second  class 
of  bonds  subordinate  to  the  foraier  issues  both  in  respect  to 
the  right  to  interest  and  to  the  assets.  This  process  is 
often  continued  until  a  corporation  may  have  many  differ- 
ent classes  of  bonds,  each  having  different  rights  and  dif- 
ferent privileges. 

In  general,  without  regard  to  the  different  classes  of 
bonds,  the  holders  of  the  same  have  two  fundamental  rights: 
First,  to  receive  a  fixed  rate  of  interest  during  the  period 
which  the  bond  runs;  and  second,  to  receive  the  face  value 
of  the  bond,  or  the  face  value  plus  a  premium  under  cer- 
tain conditions,  when  the  term  of  the  bond  ends  or  tlif  cor- 
poration is  dissolved.  In  addition  the  l)ondholders  have 
certain  privileges  through  which  they  are  enabled  to  en- 
force their  property  rights.  First,  to  have  the  business 
managed  in  their  interest  if,  for  any  reason,  the  rate  of  in- 
terest specified  in  the  bond  fails  to  be  paid;  and  second,  in 
common  with  others,  to  bid  for  the  property  u]")on  which  the 
bonds  are  secured  in  cases  where,  owing  to  the  failure  to 
pay  interest  charges,  the  corporation  becomes  bankrupt. 


86  MAURICE  H.  ROBINSON 

Third,  to  reorganize  themselves  into  a  new  corporation  and 
take  entire  control  of  the  property  and  its  management 
where  they  are  successful  in  bidding  the  property  in  at  the 
bankrupt  sale. 

Bondholders  are  thus  proprietors  who  have  relinquished 
the  privilege  of  actively  directing  the  business  in  which 
they  are  interested  in  exchange  for  a  first  claim  upon  the 
earnings  during  operation,  and  upon  the  assets  in  case  of 
dissolution.  Their  contingent  rights  in  the  management 
of  the  enterprise  appear  in  the  true  light  whenever  a  cor- 
poration is,  for  any  reason,  unable  to  pay  the  specified  rate 
of  interest.  The  immediate  result  of  the  failure  to  pay 
the  specified  interest  is,  under  normal  conditions,  the  ap- 
pointment of  a  receiver  by  the  courts  to  represent  the  in- 
terests of  the  bondholders  and  to  manage  the  property  for 
them.  If  the  receivership  is  unusually  successful,  the  bus- 
iness may  be  turned  over  to  the  stockholders  as  soon  as  it 
is  able  to  make  up  the  deferred  interest  and  to  continue  the 
stipulated  rate  for  the  immediate  future.  In  ordinary 
cases,  however,  a  corporate  enterprise  is  reorganized  or 
sold.  In  the  first  case,  the  bondholders  become  stockhold- 
ers with  preferred  rights;  in  the  latter  case,  they  usually 
purchase  the  business,  reorganize  it  themselves,  and  thus 
become  the  only  stockholders  in  the  new  enterprise. 

Where  there  are  several  classes  of  bonds,  the  respective 
rights  of  each  class  are  fixed  by  the  terms  under  which  they 
are  issued  and  follow  in  regular  gradations  from  the  high- 
est to  the  lowest.  Those  in  the  lowest  grade,  however,  in 
practically  all  cases,  precede  the  highest  grade  stocks  in  the 
rights  to  the  earnings  and  assets,  and  usually  all  classes,  ex- 
cept the  very  lowest,  have  no  direct  right  to  participate  in 
the  management  except  as  a  result  of  actual  bankruptcy 
and  the  consequent  reorganization. 

Thus  stockholders  in  a  well-organized  corporation  have 
a  double  motive  to  limit  the  amount  of  the  bonds  to  a  sum 
upon  which  they  are  able  to  pay  interest  during  term  of 


MODERN  BUSINESS  ORGANIZATION  87 

the  bonds  and  tlieir  face  at  expiration:  First,  as  stated  in 
a  previous  section,  because  the  larger  the  amount  of  bond 
issue  tlie  hii^hcr  the  rate  of  interest  at  wliich  they  can  be 
sold  in  the  open  market,  and  second,  because  in  addition 
to  paying  a  high  rate  of  interest  the  stockholders  are  in 
danger  of  losing  their  o\\ti  rights  both  in  the  assets  and 
the  future  earnings  whenever  the  business  for  any  reason 
is  subjected  to  unfavorable  conditions. 

The  Stockholders. 

Tlie  stockholders  have  certain  rights  which  are  exer- 
cised only  through  group  action,  and  are  specified  in  detail 
in  the  general  corporation  act,  the  charter  and  the  by-laws. 
These  rights  are,  first,  to  amend  and  alter  the  charter  and 
the  by-laws;  second,  to  dissolve  the  corporation;  third,  to 
elect  the  directors  and  in  some  cases  to  supervise  the  man- 
agement of  the  corporation  through  control  over  the  by- 
laws; and  fourth,  to  have  control  over  the  disposition  of  the 
permanent  assets  of  the  corporation. 

The  charter,  being  the  organic  law  under  which  the 
stockholders  are  luiited,  is,  almost  universally,  amended 
or  changed  only  by  their  formal  approval,  and  usually  by  a 
two-thirds  majority.  Since  by  changing  the  charter  the 
Yevy  nature  and  operations  of  a  corporation  may  be  entire- 
ly altered,  the  statute  law  of  the  various  states  has  very 
properly  provided  that  proposals  for  such  changes  must  be 
offered  some  time  in  advance  of  their  consideration,  due 
notice  of  such  proposals  must  be  given  and  the  amendments 
approved  by  a  large  majority  of  stockholders  before  they 
go  into  legal  effect.  Tlie  same  is  true  to  a  somewhat  more 
marked  extent  in  regard  to  the  dissolution  of  the  corpora- 
tion. However,  successful  corporations  are  seldom  dis- 
solved, and  unsuccessful  ones  are  often  permitted  to  lapse 
through  failure  to  pay  the  annual  license  fees  and  taxes. 

In  all  cases  the  direct  control  over  the  corporation  is 
exercised  by  the  directorate.    Consequently  the  method  bj; 


88  MAURICE  H.  ROBINSON 

which  the  directors  are  elected  is  ordinarily  stated  at  length 
in  the  general  corporation  act.  In  some  cases,  however, 
the  regulations  concerning  the  election  of  directors  are  left 
for  the  charter  and  the  by-laws.  In  some  instances,  the  di- 
rectors are  elected  as  a  body  annually;  in  others,  they  are 
elected  in  classes,  each  class  serving  for  a  period  of  years. 
In  either  case,  since  the  stockholders  have  the  right  to  elect, 
it  is  possible  for  them  to  outline  the  policy  which  they  wish 
to  have  followed  and  secure  a  pledge  from  the  success- 
ful candidates  for  the  directorate  in  favor  of  such  policy. 

AVhere  the  directors  are  elected  in  classes,  it  always  re- 
quires at  least  two  years  for  the  stockholders  to  gain  con- 
trol over  a  directorate  which  fails  to  represent  them. 
However,  whether  the  directors  are  elected  annually  or  for 
a  period  of  years,  they  are  by  the  law  of  the  various  states 
peiTnitted  to  act  upon  their  ovm.  judgment  in  the  manage- 
ment of  the  corporate  business.  In  a  few  cases  only,  stock- 
holders have  a  right  to  supervise  or  approve  the  formal 
action  of  the  board  of  directors.  The  most  important  of 
these  are :  First,  the  permanent  assets  of  a  corporation  may 
ordinarilybe  sold  only  on  the  approval  of  a  vote  of  the  stock- 
holders; and  second,  no  mortgage  or  other  long  term  obliga- 
tion may  ordinarily  be  authorized  by  the  directors  mthout 
their  approval.  The  principle,  as  above  stated,  holds  true 
ordinarily  for  each  class  of  stockholders.  Thus  whenever 
a  corporation  is  created  with  one  class  of  stock  only,  no 
stock  with  superior  rights  may  be  issued  except  with  the 
approval  of  the  class  already  in  existence;  and  wherever 
there  are  two  classes  of  stock  provided  for,  no  third  class 
having  superior  rights  may  be  created  by  the  board  of  di- 
rectors without  the  formal  consent  of  both  the  previous 
classes. 

The  control  over  the  management  of  a  corporation  en- 
trusted to  the  stockholders,  namely,  the  right  to  elect  di- 
rectors, to  approve  the  sale  of  permanent  assets,  and  to  au- 
thorize the  issue  of  superior  obligations,  is,  as  will  be  no- 
ticed, a  right  that  belongs  to  the  majority  of  the  stock- 


MODERN  BUSINESS  ORGANIZATION  fiP 

holders  expressed  by  a  vote  in  a  formal  meeting  of  the 
corporation.  Where  the  majority  of  tlio  stook  is  held  by 
a  small  "roup  of  men,  the  minority,  wliich  under  snch  cir- 
enmstanees  is  likely  to  be  represented  by  a  considerable 
nnmlier  of  small  stockholders,  has  no  recourse  apjainst  such 
majority  rule  except  in  cases  of  actual  fraud  or  dishonesty. 

As  individuals,  stockholders  have  additional  rights, 
some  of  which  depend  largely  upon  the  approval  of  the 
majority  by  formal  action  for  their  proper  protection.  The 
more  important  of  these  rights  are,  first,  to  participate  in 
all  stockholders'  meetings;  second,  to  receive  certain  kinds 
of  information,  and  within  specified  limitations  to  inspect 
the  books  and  accounts  of  the  company;  third,  to  share  in 
the  dividends  declared  during  the  life  of  the  corporation, 
and  in  the  assets  at  its  dissolution. 

1.  Each  stockholder  has  the  right  to  attend  all  regular 
and  special  meetings  of  the  corporation  and  to  have  good 
and  sufficient  notice  of  the  same,  including  the  time  of  the 
meeting  and  the  place  where  it  is  to  be  held.  He  is  also 
entitled  to  have  infonnation  in  regard  to  the  character  of 
the  meeting  and  the  business  that  is  to  be  presented  for  his 
consideration.  In  some  cases  such  notice  may  be  given  by 
advertisement  in  some  newspaper  designated  by  law,  but 
usually,  even  where  an  advertisement  is  required,  a  written 
or  printed  notice  must  be  mailed  to  the  address  of  each 
stockholder. 

In  the  second  place,  each  stockholder  has  the  right  to 
take  part  in  the  discussions  at  the  various  meetings,  under 
the  ordinary  rules  of  parliamentary  practice.  lie  may 
therefore  ask  for  infonnation  upon  the  business  policy  and 
practice  of  the  management,  and  offer  resolutions  for  the 
consideration  of  the  stockholdei-s,  directing  the  manage- 
ment to  take  specific  action  where  such  action  is  within 
the  scope  of  the  stockholders'  authority,  and  advising  the 
officers  in  other  cases. 

In  the  third  place,  each  stockholder  has  the  right,  gen- 


90  MAURICE  H.  ROBINSON 

erally  under  statute  law,  to  be  represented  by  some  per- 
son chosen  to  act  in  his  stead  when  for  any  reason  it  is  in- 
convenient or  impracticable  for  him  to  attend  in  person. 
The  instrument  by  which  this  right  is  conferred  is  the 
proxy  or,  more  formally,  a  special  power  of  attorney.  Such 
right  may  be  conferred  for  action  upon  a  particular  pro- 
position or  for  a  particular  meeting,  or  for  all  meetings 
mthin  the  limit  of  time  sanctioned  by  the  law  of  the  state. 
In  any  of  these  cases  the  holder  of  the  proxy  may  be  author- 
ized to  vote  upon  a  certain  proposition  in  a  specific  way, 
or  he  may  be  authorized  to  act  upon  his  own  judgment  on 
any  of  the  questions  that  legitimately  come  before  the 
stockholders  for  their  approval  or  rejection.  Under  any 
circumstances  the  stockholder  may  revoke  the  proxy  which 
he  has  granted  whenever  he  chooses,  and  in  many  states 
the  life  of  all  proxies  is  limited  by  law  to  a  term  of  years. 

The  proxy  has  its  own  peculiar  advantages  and  disad- 
vantages, which  should  be  noticed  at  this  point.  It  is  ob- 
vious of  course  that  it  permits  the  stockholder  to  be  repre- 
sented without  actually  being  present  in  person.  This 
makes  it  practicable  for  Englishmen  to  own  shares  of  stock 
in  the  South  African  diamond  mines,  and  for  residents  of 
the  eastern  states  to  invest  their  surplus  capital  in  develop- 
ing the  industries  of  the  western  states.  This  is  especially 
true  of  the  small  investor  who  can  take  up  only  a  few  shares 
in  a  corporation.  To  attend  the  various  meetings  of  the 
stockholders  would  entail  an  expense  greater  than  the 
total  income  which  he  derives  from  his  shares,  and  he  would 
hardly  care  to  invest  in  the  stock  of  companies  where  he 
has  legal  liabilities  as  a  shareholder,  but  no  practical  method 
of  exercising  his  legal  right  of  participating  in  the  meet- 
ings. 

The  proxy,  then,  gives  the  small  stockholder  a  cheap 
method  of  representation  at  all  the  meetings  of  the  corpora- 
tion. Like  all  other  good  things,  however,  it  is  liable  to 
abuse.    This  may  arise  either  as  a  result  of  misrepresenta- 


MODERN  BUSINESS  ORGANIZATION  91 

tion  by  the  proxy  holder  or  tlirongli  granting  tlic  right  to 
nnsiiitable  representatives.  In  the  first  case,  that  of  mis- 
representation, the  normal  corrective  would  seem  to  lie  m 
granting  a  specific  proxy  only.  Snch  treatment  of  the  evil 
of  misrepresentation  is,  however,  impracticable.  In  the 
first  place,  many  matters  come  up  for  action  at  the  various 
meetings  that  are  imforseen,  and  in  the  second  place  intel- 
ligent action  is  often  possible  only  after  a  full  discussion 
of  the  proposition.  To  tie  up  the  delegates  by  specific 
proxies  nullifies  all  the  good  that  may  come  from  full  and 
free  discussion  on  the  part  of  the  persons  at  the  meeting. 
Through  the  use  of  the  proxy  it  is  possible  to  hold  a  meet- 
ing of  the  stockholders  of  the  largest  corporation  with  only 
one  person  present  where,  for  any  reason,  such  person 
holds  all,  or  a  majority  of  the  proxies.  It  will  be  readily 
seen  that  in  order  to  control  the  management  the  simplest 
Avay  is  to  secure  by  solicitation,  previous  to  the  meeting, 
proxies  representing  a  majority  of  the  stock  outstanding. 
Sometimes  the  struggle  for  proxies  becomes  so  fierce  and 
bitter  as  to  resemble  a  civil  war,  and  to  result  in  the  over- 
throw of  a  management  of  long  standing,  as  in  the  case  of 
the  Fish-IIarriman  contest  for  the  control  of  the  Illinois 
Central  Railroad,  in  1907. 

Wliere  a  majority  of  the  proxies  are  in  the  control  of 
one  person,  or  in  the  control  of  a  certain  faction  represent- 
ing the  board  of  directors,  the  individual  stockholders  at 
the  meeting,  while  able  to  take  part  in  the  discussion,  are, 
it  will  be  seen,  unable  to  influence  the  vote  of  the  corpora- 
tion, since  such  vote  is  entirely  controlled  by  the  person  or 
the  group  holding  the  majority  of  the  proxies. 

In  voting  at  stockholders'  meetings  the  general  rule  is 
that  each  share  of  stock  has  one  vote.  As  noticed  above, 
however,  it  is  sometimes  provided,  as  in  the  charter  of  the 
Rock  Island  Pompany,  that  the  shareholders  of  the  pre- 
ferred stock  shall,  in  the  elertion  of  the  directors,  vote  inde- 
pendently, and  may  elect  nine  of  the  fifteen  directors.    The 


dB  MAURICE  H.  ROBINSON 

common  stockholders  elect  the  remainder.  Such  a  provi- 
sion virtually  gives  the  control  of  the  corporation  into  the 
hands  of  the  holders  of  the  preferred  stock. 

The  second  variation  from  the  usual  method  is  found  in 
the  use  of  the  principle  of  cumulative  voting.  In  some 
states,  as,  for  example,  in  Illinois,  this  method  is  authorized, 
by  statute  law,  and  is  therefore  a  right  that  belongs  to  the 
individual  stockholder.  Under  the  system  of  cumulative 
voting  each  stockholder  may  cast  all  his  votes  for  one  di- 
rector, or  distribute  his  votes  among  several,  as  he  pleases. 
The  method  thus  insures,  under  any  and  all  circumstances, 
that  a  small  group  of  stockholders,  by  acting  in  concert, 
may  have  at  least  one  representative  on  the  board  of  di- 
rectors. It  is  thus  one  of  the  most  effective  provisions 
against  the  evils  of  majority  rule. 

2.  In  a  partnership  each  of  the  partners  participates 
in  the  management  and  therefore  has  both  the  opportu- 
nity and  the  right  to  know  all  the  details  of  the  company's 
business.  The  corporation  is,  however,  both  historically 
and  logically,  a  highly  developed  form  of  partnership  in 
which  the  members  entrust  the  active  management  to  an 
elected  board  of  directors.  As  a  result  of  its  origin  the 
stockholders  formerly  possessed  the  same  right  to  complete 
information  in  regard  to  the  corporation  and  its  internal 
affairs  as  was  enjoyed  by  the  partners  in  a  firm.  Each 
stockholder  was  therefore  permitted  to  go  into  the  office  or 
to  the  works  at  his  pleasure.  It  was  found  as  a  result  of  ex- 
perience that  this  privilege  was  particularly  open  to  abuse. 
In  a  partnership  each  partner  is  likely  to  devote  his  entire 
time  and  energy  to  a  single  business  enterprise.  The  indi- 
vidual stockholder  on  the  other  hand  is  more  likely  to  be 
interested  in  several  enterprises.  He  may  even  become  a 
competitor  of  himself  and  thus  desire  information  in  regard 
to  business  conditions  and  business  policy  of  the  corpora- 
tions in  which  he  is  the  least  interested  for  the  purpose  of 
using  such  information  to  help  those  in  which  he  is  more 


MODERN  BUSINESS  ORGANIZATION  93 

interested.  lu  many  instances  competitors  have  often  pur- 
chased a  share  of  stock  in  some  rival  coi-poration  in  order  to 
gain  information  Avhich,  under  ordinary  circumstances, 
would  be  entirely  beyond  their  power  to  gain. 

This  condition  has  led  legislatures  and  courts  to  adopt 
quite  a  different  policy  from  that  originally  pursued.  In 
general  the  stockholder  is  pcnnitted  to  examine  the  stock 
and  transfer  books  by  applying  at  the  principal  office,  dur- 
ing office  hours.  However,  where  there  is  good  reason  to 
believe  that  the  party  asking  for  such  information  intends 
to  make  improper  use  of  it,  the  courts  will  not  aid  him  by 
issuing  the  proper  writ.  As  to  the  business  books  of  the 
corporation,  the  stockholder  has  no  right  of  inspection  at 
all.  For  example,  he  cannot  legally  enforce  a  demand  for 
Infoi-mation  in  regard  to  the  purchases  or  sales  of  a  com- 
pany, or  in  regard  to  its  contracts,  and  the  like.  He  is, 
however,  usually  able  to  secure  annual  reports  summar- 
izing the  income  for  the  year  and  showing  the  financial  con- 
dition of  the  corporation  at  its  termination.  But  such 
rights  may  often  be  relinquished  by  the  stockholders,  for 
the  time  being,  by  the  insertion  of  clauses  authorizing  such 
action  in  the  charter  or  the  by-laws.  As  a  matter  of  fact, 
owing  to  the  insistent  demand  of  most  investors  for  infor- 
mation in  regard  to  the  financial  condition  of  the  coi^ora- 
tions  in  which  they  hold  stock,  corporations  appealing  to 
the  general  public  for  funds  cannot  successfully  for  any 
length  of  time  adopt  a  secretive  business  policy.  Such  in- 
stitutions as  the  Standard  Oil  Company  and  the  American 
Sugar  Refining  Company  are  apparently  marked  excep- 
tions to  this  general  rule,  having  ])eeu  so  successful  under 
the  policy  of  giving  no  information  to  anyone  that  their 
stockholders  have  made  no  attempt  to  secure  even  adequate 
annual  reports. 

With  railroads  and  public  sen'ice  corporations  the  case 
is  entirely  different.  By  the  adoption  of  the  Interstate 
Commerce  Law  in  1887,  railways  doing  interstate  business 


94  MAURICE  H.  ROBINSON 

are  obliged  to  fumisli  montlily  and  annual  statements  to 
the  Commission,  and  sueh  reports  are  published  annually 
in  a  volume  called  Statistics  of  Railways  in  the  United 
States.  The  states  quite  generally  require  similar  reports 
from  local  railways  and  other  public  service  corporations. 
Some  of  this  information  is,  to  be  sure,  never  published,  and 
some  of  it  is  worthless  even  after  being  printed  and  distrib- 
uted; but  on  the  whole  the  tendency  is  toward  better  and 
more  fully  summarized  reports  for  the  benefit  of  the  indi- 
vidual stockholder,  so  that  he  places  less  and  less  depend- 
ence upon  his  own  direct  examination  of  the  company's 
books.  This  is  a  distinct  gain  for  legitimate  business  en- 
terprises, since  such  infonnation  is  more  trustworthy,  and 
in  addition  cannot  be  used  for  the  purpose  of  injuring  the 
business  of  the  corporation  which  is  giving  the  informa- 
tion. 

3.  A  corporation  earning  a  regular  income  upon  its  in- 
vestment may  use  its  surplus  earnings  in  either  one  of  the 
two  following  ways;  First,  it  may  improve  its  plant  and 
equipment  or  purchase  other  property;  second,  it  may  de- 
clare such  earnings  to  the  stockholders  in  the  form  of  divi- 
dends. In  the  first  case,  the  capital  assets  increase  in  value 
and  such  increase  is  represented  on  the  company's  books  as 
a  surplus,  as  shown  in  the  following  balance  sheet: 

BALANCE  SHEET.  CORPORATION  F. 

Assets.  Liabilities. 

Plant  and  machinery $10,000,000      Bonds   $5,000,000 

Improvements  5,000,000      Stock    5,000,000 

Surplus 5,000,000 


Total    i. $15,000,000  $15,000,000 

Let  us  assume  that  the  corporation  has  been  operating 
for  five  years,  and  during  this  period  has  been  earning  one 
million  dollars  annually,  but  has  used  this  income  to  im- 
prove its  plant  and  machinery.  Having  adopted  this 
policy,  it  has  been  unable  to  pay  dividends  in  the  ordinary 
sense  of  the  word.  The  stock  which  was  originally  worth 
its  face  value  is  now,  provided  the  imj)rovements  were  de- 


MODERN  BUSINESS  ORGANIZATION  95 

sirahle  in  themselves,  worth  twice  its  face  vahie  or  J^200  for 
each  $100  share.  Supposing  at  this  point  that  no  further 
improvements  are  desirable  and  that  the  investments  out 
of  profits  are  beginning  to  show  results  in  increased  earning 
power,  the  corporation,  having  been  able  to  earn  one  mil- 
lion dollars  annually  on  the  ten  million  invested,  will,  under 
the  assumed  conditions,  earn  one  and  one-half  million  an- 
nually on  its  fifteen  million  investment.  Assuming  a  five 
per  cent  rate  of  interest  on  the  bonds,  the  stock  was  earn- 
ing $750,000  annually  before  the  improvements  were  begun, 
or  a  rate  of  fifteen  per  cent  upon  the  capital  stock;  and 
after  the  improvements  were  completed  it  would  earn  $1,- 
250,000  annually,  or  twenty-five  per  cent  on  the  stock. 
The  directors  may,  therefore,  begin  dividends,  provided 
they  do  not  deem  it  desirable  to  increase  the  cash  surplus, 
and  declare  such  dividends  on  existing  stock  at  the  full 
earning  rate,  namely  twenty-five  per  cent.  This  policy  is, 
however,  likely  to  cause  public  criticism  and,  in  the  case 
uf  public  service  corporations,  political  interference  with 
the  rates  or  with  the  service  rendered. 

They  may,  therefore,  adopt  a  different  policy.  Since 
each  share  having  a  par  value  of  $100  represents  assets 
worth  $200,  the  total  stock  of  the  company  may,  by  an 
amendment  to  the  charter,  be  doubled  in  amount  and  one 
share  of  new  stock  issued  as  a  gift  to  each  holder  of  one 
share  of  the  former  issue,  Tlie  changes  caused  by  this  pol- 
icy are  shown  in  the  following  balance  sheet: — 

BALANCE  SHEET.  CORPORATION  G. 

Assets.  Liabilities. 

Plant   and    machinery   with  Bonds     $5,000,000 

improvements    $15,000,000      Stock    10,000,000 


Total    $15,000,000  $15,000,000 


The  process  of  converting  the  existing  surplus  into  ad- 
ditional stock,  as  described  above,  is  called  declaring  a 
stock  dividend  or,  in  the  expressive  language  of  Wall  Street, 
*  *  cutting  a  melon. ' '    Wherever  a  real  surplus  exists  and  the 


m  MAURICE  H.  ROBINSON 

stock  representing  it  is  issued  pro  rata  to  all  the  present 
stockholders,  no  valid  criticism  against  this  method  of  de- 
claring a  dividend  can  be  presented.  Such  a  surplus  can  be 
created  only  by  withholding  the  earnings  and  those  who 
have  held  their  stock  during  the  waiting  period  are  entitled, 
upon  both  moral  and  economic  grounds,  to  their  share  of  the 
new  stock.  In  some  cases,  however,  the  directors  instead 
of  giving  new  stock  as  a  bonus  to  the  existing  stockholders, 
either  by  choice  or  as  a  result  of  statute  law,  require  that 
all  new  issues  shall  be  sold  for  cash  and  offer  such  shares 
to  a  public  or  private  market.  Let  us  suppose  that  such 
shares  are  offered  to  the  existing  stockholders,  pro  rata,  at 
$75  per  share.  In  this  case  the  stock  is  offered  to  a  private 
market.  Those  stockholders  who  have  funds  available  for 
investment  are  in  a  position  to  take  up  their  quota  and  thus 
make  $25  per  share  by  purchasing  the  new  stock  at  less 
than  its  real  value.  On  the  contrary,  those  who  have  no 
funds  available  for  investment  at  the  time  the  new  stock  is 
offered,  will  be  unable  to  take  advantage  of  this  opportu- 
nity. In  such  cases  the  stockholder's  rights  to  subscription 
become  of  value  when  a  corporation,  either  by  force  of  law 
or  through  the  application  of  the  principles  of  equity,  pro- 
vides for  such  contingencies,  and  the  latter  class  of  share- 
holders are  able  to  sell  their  rights  for  cash  and  thus  realize 
upon  their  surplus  in  this  way. 

Until  the  economic  right  of  every  stockholder  to  partic- 
ipate in  the  distribution  of  dividends  through  the  issue  of 
additional  stock  shall  be  fully  guaranteed  by  statute  law  in 
every  state,  there  will  be  opportunity  to  withhold  earnings 
for  a  period  of  years,  create  a  surplus,  issue  additional  stock 
to  represent  the  same,  and  then  give  those  shareholders 
having  surplus  capital  the  chance,  which  they  ordinarily  do 
not  hesitate  to  use,  of  subscribing  for  stock  which  was  not 
taken  up  by  the  other  shareholders.  Unfortunately  this 
method  of  defrauding  certain  members  of  the  corporation 
for  the  benefit  of  the  rest  is  of  much  less  importance  than 


MODERN  BUSINESS  ORGANIZATION  97 

fonnerly  owing  partly  to  the  protection  offered  by  ohanLros 
in  the  statute  law  of  many  states,  and  partly  to  the  faet  that 
stockholders  as  a  result  of  experience  take  the  precaution  to 
protect  themselves  when  new  issues  of  this  kind  are  au- 
thorized. Where  such  stock  is  offered  to  the  public  mar- 
ket, those  shareholders  in  closest  touch  with  the  financial 
situation  will  have  a  decided  advantage  in  taking  up  the 
new  issues.  At  the  present  time,  however,  such  stock  must 
ordinarily  be  offered  first  to  the  present  shareholders  rather 
than  to  the  public  market. 

In  the  second  case,  the  capital  assets  increase  regularly 
during  each  year,  but  at  the  end  of  such  period  are  reduced 
to  their  foiTner  status  by  the  conversion  of  the  surplus  into 
dividends.  The  changes  which  the  assets  and  liabilities  of 
a  corporation  undergo  as  a  result  of  this  process,  are  shown 
by  the  following  series  of  balance  sheets: 

BALANCE  SHEET.  CORPORATION  H. 

(a)     At  the  Beginning  of  the  Year. 

Assets.  Liabilities. 

Plant  and  machinery $10,000,000      Bonds    $  .^.nnn.nno 

Stock     5.000,000 


Total      $10,000,000  $10,000,000 


(b)     At  the  End  of  the  Year. 

Assets.  Liabilities. 

Plant  and  machinery $10,000,000      Bonds    $  5,000,000 

Cash    1.000,000       Stock    5.000,000 

Surplus     1.000.000 


Total    $11,000,000  $11,000,000 


(c)      .•\fter  the    Dividend   is   Declared. 

Assets.  Liabilities. 

Plant  and  machinery $10,000,000       Bonds    $  5,000,000 

Cash    1.000,000      Stock    5,000,000 

Dividend  No.  1 1.000,000 


Total    $11,000,000  $11,000,000 


(d)     After  the   Dividend  is  Paid. 

Assets.  Liabilities. 

Plant  and  machinery $10,000,000       Bonds     $  5,000.000 

Stock     5,000.000 


Total      $10,000,000  $10,000,000 

— —  ■  —7 

B  — II— 7 


98  MAURICE  H.  ROBINSON 

Generally  the  right  to  declare  dividends  is  granted  to 
the  directors  of  a  corporation.  Under  such  circumstances 
the  stockholders  cannot  by  vote  require  them  to  take  action 
upon  the  question  of  dividends,  much  less  fix  the  rate  at 
which  they  shall  be  declared.  However,  when  once  a  divi- 
dend is  declared  by  the  board  of  directors,  the  individual 
stockholders  have  the  right  to  share  in  it  in  proportion  to 
their  stock.  Moreover  they  can  collect  the  amount  due 
them  from  the  corporation  by  use  of  the  legal  method  of 
collecting  debts.  ■^Vllenever  there  are  two  or  more  classes 
of  stock,  the  respective  rights  of  each  class  are  fixed  in  the 
charter.  The  holders  of  shares  in  any  class  then  have  the 
right  to  dividends  as  they  are  declared,  but  as  individuals 
they  have  no  right  on  account  of  owning  a  superior  class 
of  stock  to  compel  the  directors  to  authorize  a  dividend. 
For  example,  the  holder  of  seven  per  cent  cumulative  pre- 
ferred stock  has  no  legal  right  to  a  di\^dend  at  all  except 
when  such  is  duly  authorized  by  the  board  of  directors.  In 
this  respect  all  classes  of  stockholders  are  in  the  same  rela- 
tive position. 

At  the  dissolution  of  a  corporation,  whether  by  limita- 
tion, by  legislative  act,  or  by  insolvency,  the  stockholders 
have  the  right  individually  to  share  proportionately  in  the 
assets,  after  all  debts  for  which  the  corporation  is  legally 
liable  are  satisfied.  This  is  the  rule  where  there  is  one 
class  of  stock  only.  Where  there  is  preferred  stock  as  well 
as  common  stock,  it  is  usually  provided  by  statute  that 
such  stock  must  be  paid  in  full  before  any  distribution  can 
be  made  to  the  general  or  common  stockholders.  Such  is 
the  New  Jersey  law.  It  is  however  usually  possible  to 
provide  in  the  charter  that  superior  stock  may  be  preferred 
as  to  dividends  only,  and  that  in  this  case  it  shall  share 
the  assets  equally  with  the  common  stock  when  the  corpo- 
ration is  dissolved.  In  such  cases  all  stockholders  have  the 
right  to  share  equally  in  the  assets  of  the  corporation. 


MODERN  BUSINESS  ORGANIZATION  99 

Liabilities  of  Stockholders. 

In  general,  stocklioldei^  are  free  from  any  personal  lia- 
bility for  debts  due  the  creditors  of  a  corporation.  This 
principle  was  adopted,  as  has  been  shown  in  an  earlier 
section,  as  a  result  of  the  recognition  of  the  personality  of 
the  corporation.  It  however  involves  a  complementary 
principle,  namely,  that  each  share  of  stock  shall  be  paid  for 
in  full  at  the  inception  of  the  company,  and  that  the  assets 
have  been  maintained  intact  since  organization.  It  is 
not  unusual,  however,  for  a  corporation  to  provide  for 
the  issuance  of,  for  example,  ten  million  dollars'  worth  of 
capital  stock,  and  to  begin  business  on  one-fourth  of  that 
amount  by  calling  for  twenty-five  per  cent  only  of  the  face 
value  of  the  stock  issued,  specifying  that  the  remainder, 
namely,  seventy-five  per  cent,  may  be  paid  in  installments 
or  upon  call  by  the  board  of  directors.  In  such  cases  the 
individual  stockholder  is,  of  course,  liable  for  the  unpaid 
balance  to  satisfy  the  claims  of  the  creditors. 

A  more  complicated  case  arises  where  the  same  con- 
dition exists  with  this  exception :  That  the  stock  so  issued 
is  subject  to  no  further  calls  for  payment,  but  is  called  fully 
paid  and  non-assessable.  Here  the  corporation  cannot  by 
its  own  vote  assess  outstanding  stock,  but  if  in  the  course 
of  business  it  incurs  indebtedness  in  excess  of  its  coi'porate 
assets,  it  is  the  duty  of  the  courts  to  compel  the  individual 
stockholders  to  pay  up  in  full  or  as  much  thereof  as  is 
needed  to  pay  all  just  obligations. 

Wliere  the  stock  is  paid  for  in  cash  or  its  equivalent, 
the  case  is  a  clear  one  and  presents  no  difficulties.  "Wliere, 
however,  as  so  often  occurs,  part  of  the  stock  is  issued  in 
exchange  for  property  whose  value  is  not  well  established, 
the  application  of  this  principle  is  exceedingly  perplexing. 
Suppose,  for  example,  a  partnership  has  outgrown  the 
proper  limitations  of  this  form  of  business  organization, 
and  is  converted  into  a  corporation.    Tlie  partners  become 


100  MAURICE  H.  ROBINSON 

stockholders  and  issue  stock  to  themselves  against  their 
former  partnership  interests.  The  value  of  the  partner- 
ship property  may  be  difficult  to  ascertain,  and  the  stock 
issued,  as  it  appears,  may  be  in  excess  of  the  real  value 
of  the  property.  Conditions  may  change;  the  business 
may  become  unprofitable  and  bankruptcy  may  follow.  The 
claims  of  the  creditors  exceed  the  selling  value  of  the 
assets  and  either  the  creditors  must  lose  or  the  stockhold- 
ers must  be  assessed  by  the  courts  to  make  up  the  deficit. 
The  question  then  turns  upon  the  valuation  of  the  assets 
and  the  relation  of  such  valuation  to  the  amount  of  stock 
issued. 

Such  cases  where  no  fraud  in  valuation  was  originally 
intended  present  unusual  difficulties,  and  led  to  the  adop- 
tion of  the  clause  in  the  New  Jersey  statute  providing  that 
where  stock  is  issued  for  property,  in  the  absence  of  actual 
fraud  in  the  transaction,  the  judgment  of  the  directors 
as  to  the  value  of  the  property  purchased  shall  be  conclu- 
sive. 

Even  where  the  stock  issued  at  the  organization  of  the 
corporation  was  paid  for  in  full,  it  is,  of  course,  possible, 
by  paying  dividends  out  of  the  capital  assets,  to  create  a 
real  deficit,  and  thus,  in  cases  of  insolvency,  defraud  the 
creditors,  unless  either  the  stockholders  or  the  directors 
or  both  can  be  held  liable  for  the  amount  thus  diverted 
to  the  stockholders.  Where  the  accounts  are  accurately 
and  honestly  kept,  the  declaration  and  payment  of  such  a 
dividend  would,  of  course,  show  upon  the  books  and  the 
prospective  creditors  could,  if  they  had  access  to  such  ac- 
counts, make  allowance  for  the  deficit;  but  usually  where 
such  dividends  are  declared  the  accounts  are  '* doctored" 
so  that  the  true  condition  of  the  corporation's  finances 
are  concealed. 

To  illustrate  this  situation,  let  us  assume  that  a  corpo- 
ration is  engaged  in  mining  copper.  Its  deposits  of  copper 
are  estimated  to  be  worth  $8,000,000  and  its  plant  $2,000,- 


MODERN  BUSINESS  ORGANIZATION         101 

000.  It  bas  outstanding  $10,000,000  in  par  value  of  capital 
stock.  After  operating  for  a  year  it  has  taken  out  one- 
eighth  of  its  entire  copper  deposits  and  has,  after  paying  ex- 
penses, $1,000,000  in  cash.  Its  correct  financial  status  at 
this  time  is  shown  in  the  following: 

BALANCE  SHEET.    COMPANY  I. 
Assets  Liabilities 

Copper  ore  $  7,000,000       Capital  Stock  $10,000,000 

Plant  and  Machinery  2,000.000 

Cash  1,000,000 


$10,000,000  $10,000,000 


Having  cash  in  the  treasury,  the  directors  may  declare 
a  dividend  though  it  is  evident  that  it  must  be  paid  out  of 
assets  rather  than  out  of  profits.  Disliking  to  acknowledge 
the  real  condition  of  affairs,  the  directors  declare  a  divi- 
dend of  8  per  cent  and  at  the  same  time  inflate  the  assets 
by  the  same  amount.  The  financial  condition  of  the  com- 
pany after  this  adjustment  has  been  made  is  shown  in  the 
following: 

BALANCE  SHEET.    COMPANY  I. 

After  Declaring  Dividend. 

Assets  Liabilities 

Copper  ore  $  7.500,000      Capital    Stock  $10,000,000 

Plant  and  machinery  2,500,000      ©ividend  No.  1  800,000 

Cash  1.000,000      Surplus  200,000 


$11,000,000  $n.nno,nno 


Assuming  that  the  stockholders  have  the  right  to  ex- 
amine the  books  or  that  full  accounts  are  published  and 
distributed  among  them,  the  conclusion  reached  by  the 
average  stockholder  will  be  somewhat  as  follows:  The  com- 
pany has  taken  out  $500,000  worth  of  ore  and  has  sold  it 
at  prices  netting  $1,000,000  after  paying  operating  ex- 
penses. At  the  same  time  the  plant  and  the  machinery 
have  been  improved  by  the  expenditure  of  $500,000.  A 
dividend  of  8  per  cent  then  distributes  only  four-fifths  of 


102  MAURICE  H.  ROBINSON 

the  net  income  for  the  year.  This  condition  is  highly  grati- 
fying to  the  stockholders  and  they  accept  the  dividend  de- 
clared and  compliment  the  management. 

Let  us  suppose  this  process  is  continued  for  several 
years  and  the  stock  of  ore  begins  to  show  exhaustion. 
Every  ton  mined  is  encumbered  with  an  increased  cost  of 
production  and  when  the  ore  is  exhausted  the  plant  is  like- 
ly to  be  practically  worthless.  If,  during  this  period,  debts 
are  allowed  to  accumulate,  the  creditors  find  themselves 
secured  by  an  empty  mine  and  a  plant  whose  value  is  de- 
pendent upon  the  value  of  the  ore  deposits.  It  is  plain, 
therefore,  that  the  creditors  cannot  have  their  claim  satis- 
fied through  the  sale  of  the  assets.  Who,  then,  ought  to 
make  such  claims  good?  Clearly  the  directors  who  have 
been  declaring  dividends  out  of  the  assets,  and,  since  the 
stockholders  constitute  the  corporation,  and  are  liable  for 
the  election  of  the  directors,  and  have,  at  the  same  time, 
been  receiving  the  assets  in  the  form  of  dividends,  they 
should  pay  such  just  debts  rather  than  shift  them  upon 
those  business  enterprises  from  whom  they  have  been  pur- 
chasing materials  or  receiving  credit. 

Recognizing  the  equity  of  this  principle,  the  legisla- 
tures and  the  courts  in  the  United  States  have  generally 
prescribed  by  law  and  judicial  decision  that  stockholders 
are  liable  to  creditors  of  the  corporation  when  insolvency 
is  caused  by  the  pa;\Tnent  of  dividends  out  of  the  assets. 
And  this  is  the  general  rule  even  though  the  stockholders 
have  themselves  been  deceived  as  to  the  real  condition  of 
the  finances  of  the  company. 

The  stockholders  are  also  individually  liable  to  the 
creditors  of  the  company  where  a  similar  financial  condi- 
tion has  been  brought  about  in  a  more  formal  way,  namely, 
by  reducing  the  amount  of  the  capital  stock  and  distrib- 
uting a  proportionate  part  of  the  assets  to  the  individual 
shareholders.  The  principle  involved  in  all  these  cases 
is  one  and  the  same.    The  individual  stockholder  is  freed 


MODERN  BUSINESS  ORGANIZATION         103 

from  liabilit}^  for  debts  upon  condition  that  the  par  value 
of  stock  is  represented  by  actual  assets  of  equal  value 
throughout  the  life  of  the  corporation  and  so  long  as  any 
imsatisfied  creditors  are  in  existence. 

In  some  of  the  states,  notably  New  York,  Indiana, 
North  Dakota,  Pennsylvania,  South  Dakota  and  Tennes- 
see,* special  consideration  is  shown  the  employe  by  per- 
mitting him  to  recover  directly  from  the  individual  stock- 
holders wherever  he  is  unable  to  obtain  the  payment  of  his 
just  dues  for  service  rendered  from  the  corporation  itself. 
And  in  two  of  the  states,  Califomiia  and  jNFinnesota,  all 
stockholders  are  subject  to  a  double  liability  as  are  stock- 
holders in  the  national-banking  corporations  formed  under 
federal  law. 

The  Creditors. 

Every  business  enterprise,  whatever  the  form  of  organ- 
ization, is  constantly  using  capital  and  labor  furnished  on 
credit  by  investors,  other  business  enterprises  and  work- 
men, and  consequently,  the  rights  of  such  creditors  are  of 
considerable  importance  to  the  corporation.  A  part  of  the 
creditors  are  usually  secured  by  the  pledge  of  certain 
definite  portions  of  the  assets.  The  remainder  are  secured 
only  by  claim  upon  the  general  assets.  In  general  the  em- 
ployes take  precedence  over  all  other  classes  of  unsecured 
creditors,  and  in  some  of  the  states,  as  noted  above,  may 
even  collect  from  the  stockholders  of  the  coi^Doration  when 
unable  to  do  so  from  the  corporation  itself. 

The  rights  of  creditors  become  of  special  importance  in 
cases  of  insolvency.  Under  such  circumstances  their 
claims  may  be  satisfied  in  full  by  the  contribution  of  addi- 
tional capital  on  the  part  of  those  holding  the  contingent 
interest,  or  such  creditors  may  become  either  bondholders 
or  stockholders  or  both,  in  the  reorganized  company  as 


*In  some  of  the  above  states  all  corporations  formed  under  the  general 
act  are  included.  In  others  only  mining,  manufacturing  and  other  mdus- 
trial  corporations  are  subject  to  this  rule. 


104  MAURICE  H.  ROBINSON 

the  case  may  seem  to  warrant.  So  long  as  their  claims  are 
paid  when  due,  the  creditors,  like  the  bondholders,  have  no 
right  to  interfere  in  any  way  in  the  management  of  the 
enterprise. 

The  Directors. 

The  directors  of  a  corporation,  being  at  the  same  time 
stockholders,  are,  in  their  latter  capacity,  subject  to  all 
of  the  liabilities  and  possess  all  of  the  rights  which  belong 
to  the  latter  body.  In  their  capacity  as  directors  of  the 
corporation,  however,  they  act  as  the  chosen  leaders  of  the 
stockholders  of  the  corporation  in  managing  its  affairs, 
and  on  this  account  possess  certain  additional  rights  and 
are  subject  to  certain  additional  liabilities  which  need 
enumeration  and  explanation. 

The  duties  of  the  directors  are  stated  in  a  general  way 
in  the  corporation  acts  of  the  several  states.  They  are 
further  enumerated  in  the  charter  or  in  the  by-laws,  usu- 
ally the  latter.  They  are  defined  at  length  in  the  judicial 
decisions  that  have  been  handed  down  from  time  to  time 
by  the  English  and  American  courts.  In  general  the  du- 
ties of  the  directors  of  a  corporation  are  as  follows: 

1.  To  manage  the  business  affairs  of  the  corporation. 

2.  To  arrange  for  meetings  of  the  stockholders  and  to 
furnish,  when  required,  by  the  state  laws  or  the  by-laws, 
annual  reports  showing  the  financial  condition  of  the  cor- 
poration. 

3.  To  fill  vacancies  in  their  own  number,  such  ap- 
pointments to  hold  until  the  next  meeting  of  the  stock- 
holders. 

The  Directors  as  Managers. 

The  Illinois  corporation  act  states  that  ^'the  corporate 
powers  shall  be  exercised  by  a  board  of  directors  or  mana- 
gers." Beyond  providing  that  the  directors  may  adopt 
by-laws  for  the  government  of  its  officers  and  the  affairs 
of  the  company,  requiring  them  to  keep  correct  books  of 


MODERN  BUSINESS  ORGANIZATION        105 

account  of  all  the  Inisincss,  and  specifying  the  penalties 
for  declaring  dividends  out  of  capital,  the  manner  in  which 
thov  may  exercise  such  corporate  powers  is  loft  largely 
to  the  board,  subject,  of  course,  to  the  jurisdiction  of  the 
coui*ts. 

The  New  Jersey  statute  is  quite  similar,  providing  that 
**the  business  of  every  corporation  shall  be  managed  by  its 
directors."  ** Individual  stockholders,"  said  Vice  Chan- 
cellor Green  of  New  Jersey  in  Ellerman  v.  Chicago  Junc- 
tion Railways,  Etc.,  Co.,*  ''cannot  question,  in  judicial 
proceedings,  corporate  acts  of  directors  if  the  same  are 
within  the  powers  of  the  corporation,  and,  in  furtherance 
of  its  purposes,  are  not  unlawful  or  against  good  morals, 
and  are  done  in  good  faith  and  in  the  exercise  of  an  honest 
judgment.  Questions  of  policy  of  management,  of  expedi- 
ency of  contracts  or  action,  of  adequacy  of  consideration 
not  grossly  disproportionate,  of  lawful  appropriation  of 
corporate  funds,  are  left  solely  to  the  honest  decision  of 
the  directors  if  their  powders  are  without  limitation  and 
free  from  restraint.  To  hold  otherwise  would  be  to  substi- 
tute the  judgment  and  discretion  of  others  in  the  place  of 
those  detenniued  on  by  the  scheme  of  incorporation." 

As  managers  of  the  corporation,  then,  the  directors, 
under  the  statute  law  and  within  the  limitations  fixed  by 
the  charter  and  by-laws  are  authorized  and  expected  to 
organize  the  operating  departments  of  the  business,  to  em- 
l)loy,  supervise  and  discharge  all  officers  and  woi-kmen,  to 
keep  full  and  correct  books  of  account,  to  outline  in  a  gen- 
eral way  tlie  financial  policy  and  business  activities  of  the 
corporation,  to  detennine  the  net  earnings  of  the  cnni]")any 
annually,  and  declare  the  same  in  dividends  or  reinvest  the 
siu'plus  in  improvements,  where  such  policy  is  pennitted 
by  the  state  laws,  and  in  general  to  exercise  tlie  same 
supervision  over  the  affairs  of  the  company  as  an  individ- 
ual proprietor  would  over  his  own  property.    In  its  man- 

*49  New  Jersey   Equity. 


106  MAURICE  H.  ROBINSON 

agemen't,  however,  the  directors  are  required  to  act,  not  as 
individuals,  but  as  a  single  body.  All  important  questions 
of  business  policy  and  all  important  contracts  must  come 
before  them  for  consideration  and  action  at  regular  or 
special  meetings.  Matters  of  routine  may,  of  course,  after 
the  general  policy  has  been  determined,  be  entrusted  to  the 
proper  officers  to  be  carried  into  execution. 

The  three  really  important  functions  of  the  directors  as 
managers  are:  First,  to  organize  the  business  into  depart- 
ments, select  or  approve,  on  recommendation  of  a  commit- 
tee, the  heads  of  such  departments,  and  authorize  the 
appointment  of  assistants  and  the  employment  of  work- 
men; second,  to  determine,  in  a  general  way,  the  activities 
of  the  corporation,  requiring  all  important  contracts  and 
questions  of  business  policy  to  come  before  them  for  direct 
action,  but  giving  heads  of  departments  considerable  lib- 
erty in  the  execution  of  the  general  policies  established  by 
them:  such  liberty  of  action  will  generally  be  exercised 
without  abuse,  providing  full  reports  are  submitted  regu- 
larly to  the  directors;  and  third,  to  determine  the  dividend 
policy  of  the  corporation. 

It  has  been  said  that  a  corporation  is  created  for  the 
purpose  of  earning  profits  and  dividing  the  same  among 
the  stockholders  in  the  form  of  dividends.  In  the  case  of 
business  corporations  this  is  undoubtedly  true,  but  as 
shown  above,  it  is  sometimes  better  business  policy  to  with- 
hold dividends  for  a  period  of  years  and  use  the  surplus 
earnings  for  improvement  of  plant  or  machinery,  or  for 
the  extension  of  the  activities  of  the  company  rather  than 
distribute  the  profits  annually.  Which  of  these  two  poli- 
cies is  better  depends  largely  upon  conditions  that  vary 
in  specific  cases.  Hence  every  corporation  presents  a  sepa- 
rate and  distinct  problem,  but  the  following  may  be  laid 
do^\Ti  as  a  general  principle.  In  a  country  rapidly  develop- 
ing from  the  technical  and  industrial  point  of  view,  every 
business  enterprise  is  likely  to  need  for  the  most  efficient 


MODERN  BUSINESS  ORGANIZATION        107 

operation,  more  and  more  capital,  a  larc^or  and  larc^er  plant 
or  plants,  and  more  oxponsivo  machinery  as  tlie  years  go 
by.  If  all  of  the  annual  earnings  are  distrilnited  annually 
to  the  shareholders,  the  enterprise  will  become  less  and 
less  efficient  relatively,  and  in  the  course  of  time  insolvent. 
To  avoid  this  unfortunate  contingency  additional  capital 
must  be  invested  in  the  enterprise.  Such  additional  capital 
may  come  from  outside  sources  or  from  those  who  now 
hold  the  stock.  If  the  enterprise  is  a  prosperous  one,  those 
now  holding  its  shares  will  naturally  wish  to  furnish  the 
new  capital  and  thus  continue  to  control  it.  Tliey  may 
accomplish  their  purpose  either  by  declaring  all  the  earn- 
ings in  dividends  annually  and  increasing  the  capital  stock 
as  needed,  or  by  foregoing  dividends  and  using  the  surplus 
to  improve  the  plant.  As  the  former  of  the  two  processes 
is  attended  with  more  or  less  expense,  it  is  often  better 
policy  to  adopt  the  latter  course. 

To  forego  dividends,  however,  even  for  a  period,  has 
one  disadvantage.  It  is  particularly  imfortunate  for  those 
shareholders  who  depend  on  their  dividends  for  a 
whole  or  a  part  of  their  annual  living  expenses.  The  di- 
rectors, therefore,  in  determining  upon  a  dividend  policy 
ought  to  take  into  consideration  the  character  of  the  stock- 
holders and  the  effect  of  withholding  the  annual  earnings 
upon  those  who  need  such  income  to  meet  their  own  living 
expenses.  Wliile  the  policy  of  withholding  dividends  for 
the  purpose  of  improving  the  plant  may  thus  be  defensible 
from  the  standpoint  of  the  corporate  enterprise,  it  may  be 
harmful  to  the  welfare  of  a  considerable  portion  of  its 
shareholders. 

On  the  other  hand  the  directors  may  adopt  the  policy 
of  declaring  dividends  in  excess  of  the  actual  earnings, 
concealing  the  practice  by  padding  the  assets.  Such  prac- 
tice is  usually  forbidden  by  statute  law  and  by  the  by- 
laws of  every  respectable  company,  and  is  further  discour- 
aged by  making  the  directors  liable  to  the  creditors  for  any 


108  MAURICE  H.  ROBINSOK 

loss  sustained  thereby.  This  penalty,  however,  does  not 
protect  the  interests  of  the  stockholders  whose  future 
prospects  may  in  this  way  be  partially  or  wholly  ruined. 

It  has  been  assumed  in  the  foregoing  discussion  that 
the  directors,  in  deciding  their  policy,  have  the  best  inter- 
ests of  the  company  at  heart.  It  will  be  evident  on  reflec- 
tion, however,  that  the  power  to  declare  or  withhold  divi- 
dends may  be  used  for  illegitimate  purposes,  among  which 
that  of  causing  fluctuations  in  the  price  of  the  stock  is  the 
most  pernicious.  It  has  been  noticed  that  one  of  the  ad- 
vantages of  the  corporation  is  the  ready  transferability  of 
its  shares.  To  facilitate  such  transfers  stock  exchanges 
are  established  and  maintained  in  the  larger  cities.  The 
stock  of  each  corporation  of  public  importance  is  being 
regularly  bought  and  sold  on  the  exchanges  or  on  the  curb 
which  grows  up  about  the  exchanges  and  one  of  the  impor- 
tant criterions  by  which  the  price  of  the  stock  is  governed 
is  the  dividend  rate.  To  increase  this  rate  causes  an  ad- 
vance in  the  selling  price  of  the  stock.  To  lower  the  rate, 
the  reverse.  And  this  is  true  even  though  such  changes  in 
the  dividend  rate  bear  no  direct  relationship  to  the  annual 
earning  rate  of  the  company.  Consequently,  the  board  of 
directors  may  withhold  dividends  or  reduce  the  rate  even 
where  the  earning  power  is  unchanged,  and  thus  cause  the 
stock  to  sell  at  a  lower  price.  Later  they  may  increase 
the  rate  and  thus  cause  an  advance  in  price.  They  may, 
as  individuals,  purchase  the  stock  when  it  is  selling  at  a 
low  price  and  sell  it  later  when  it  is  going  at  a  higher  price. 

Thus  the  directors  may,  by  changing  the  dividend  rate, 
cause  variations  in  the  price  of  stock  and  take  advantage 
of  their  own  action  as  directors  to  enrich  themselves  as 
individuals  at  the  expense  of  the  other  stockholders.  Such 
practices,  while  not  sanctioned  in  the  better  corporations-, 
have  been  altogether  too  common  in  American  corpora- 
tion finance  to  be  overlooked.  Since  the  directors  are, 
under  ordinary  circumstances,  permitted  by  law  to  declare 


MODERN  BUSINESS  ORGANIZATION        109 

(lividoTifls  Avlion  mid  at  wliat  rate  thoy  sco  fit,  the  only 
effective  safeguard  in  the  liands  of  the  stoekholders  is  the 
power  to  change  tlie  directors  at  the  annual  elections. 

The  Directors  and  the  Stockholders. 

A  second  function  of  tlic  directors  is  to  arran(]^e  through 
the  proi^er  officers  for  the  regular  meetings  of  the  stock- 
holders and  see  that  matters  properly  coming  before  them 
are  presented  in  an  orderly  way  and  that  the  action  taken 
is  correctly  recorded  and  faithfully  carried  into  effect.  In 
some  states  it  is  provided  by  statute,  and  in  most  corpo- 
rations by  the  by-laws,  that  the  directors  shall  keep  accu- 
rate books  of  account  showing  correctly  and  fully  the  trans- 
actions of  the  company.  In  some  states  it  is  made  the 
duty  of  the  directors  to  see  that  stockholders  have  access 
to  the  books  during  business  hours.  In  the  by-laws  of 
many  corporations  it  is  also  provided  that  a  summarized 
statement  of  the  results  of  the  business  in  the  form  of  an 
annual  balance  sheet  showing  the  assets  and  liabilities 
properly  arranged  and  an  income  account  showing  the  an- 
nual income  and  outgo,  be  published  and  distributed  to  the 
stockholders  at  or  before  the  annual  meeting. 

The  Directors  and  Vacancies. 

The  directors  may  ordinarily  fill  vacancies  in  their  oaati 
number,  such  appointments  to  hold  until  the  next  regular 
meeting  of  the  stockholders.  The  stockholders  may,  in 
the  by-law^s,  provide  for  any  other  method  of  filling  va- 
cancies, or  may  permit  such  vacancies  to  remain  until  the 
regular  meeting  for  the  election  of  officers.  Usually  a 
director  cannot  be  removed,  either  by  the  board  or  by  the 
stockholders,  unless  provision  for  such  action  is  made  in 
the  charter.  In  some  states,  however,  a  director  may  be 
removed  for  misconduct  in  office  by  action  at  law  institu- 
ted through  the  office  of  the  attorney-general  of  the  state. 


no  MAURICE  H.  ROBINSON 

Liabilities  of  Directors. 

The  directors  of  a  corporation  in  their  capacity  as  tlie 
organized  administrative  board  in  charge  of  its  business  af- 
fairs are  trustees  for  the  stockholders  and  are  expected  to 
use  discretion  in  the  management  of  its  affairs,  to  conform 
to  the  law  of  the  states  and  to  the  provisions  of  the  charter 
and  the  by-laws.  So  long  as  they  observe  the  above  re- 
quirements they  are  free  to  act  in  good  faith  according  to 
their  own  judgment.  If,  however,  they  fail  to  conduct  the 
corporate  business  in  accordance  with  the  above  conditions, 
they  are  ordinarily  subjected  to  personaal  liabilities  for  cer- 
tain specific  acts  of  which  the  following  are  the  more  im- 
portant: 

1.  For  declaring  dividends  except  out  of  the  surplus 
profits. 

2.  For  issuing  stock  as  fully  paid  when  in  fact  it  is  only; 
partly  paid  for. 

3.  For  disobedience  to  the  laws  of  the  state  or  states 
in  which  the  company  is  operating. 

4.  For  failure  to  exercise  reasonable  care  and  good 
faith  in  the  management  of  the  affairs  of  the  corporate 
business. 

1.  As  it  is  the  function  of  the  directors  to  declare  div- 
idends so  it  is  their  duty  to  use  discretion  in  such  action  and 
to  make  distribution  to  the  stockholders  only  out  of  the 
surplus.  For  this  reason,  among  others,  they  are  required 
to  keep  accurate  books  of  accounts  in  order  that  they  may 
be  satisfied  that  any  distribution  in  the  form  of  dividends 
will  not  impair  the  solvency  of  the  corporation.  The  Illi- 
nois corporate  act  is  especially  explicit  upon  this  point.  It 
states:  ^*If  the  directors  or  other  officers  or  agents  of  any 
stock  corporation  shall  declare  and  pay  any  dividend 
when  such  corporation  is  insolvent,  or  any  dividend  the  pay- 
ment of  which  would  render  it  insolvent,  or  which  would 
diminish  the  amoimt  of  its  capital  stock,  all  directors,  of- 


MODERN  BUSINESS  ORGANIZATION        111 

ficcrs  or  agents  assenting  thereto  sLall  be  jointly  and  sev^er- 
ally  liable  for  all  the  del)ts  of  snch  corporation  then  exist- 
ing, and  for  all  that  shall  thereafter  be  contracted  while 
they  shall,  respectively,  continue  in  office." 

The  New  Jersey  act  is  essentially  the  same  T\dth  the  pro- 
vision that  any  director  who  was  absent  at  the  time  the 
dividend  was  declared  or  who  dissented  from  the  action 
when  it  was  taken,  mRj  exonerate  himself  from  the  liabil- 
ity by  causing  his  dissent  to  be  entered  at  large  on  the  min- 
utes or  by  publishing  notice  of  his  dissent  in  a  newspaper 
in  the  county  where  the  corporation  has  its  principal  office. 
The  directors,  then,  being  responsible  for  the  declaration  of 
dividends  which  have  not  been  earned,  are  thus  in  the  first 
instance  held  liable,  jointly  and  individually,  for  losses 
caused  the  creditors  of  the  corporation.  Accordingly  the 
stockholders  who  ultimately  are  liable  for  such  distribution 
of  the  assets  are  ordinarily  protected  from  loss  through  the 
prior  liability  of  the  directors. 

2.  In  a  similar  way  the  directors  are  personally  liable 
for  losses  occasioned  by  failure  to  provide  for  the  full  pay- 
ment of  the  stock  at  the  organization  of  the  company.  This 
provision  rests  upon  essentially  the  same  principle.  Fail- 
ure to  pay  for  the  stock  in  full  at  the  organization  causes  a 
deficit  at  the  beginning  of  the  corporate  existence.  The 
declaration  of  dividends  out  of  capital  brings  about  exactly 
the  same  condition  after  the  coiporation  has  been  in  opera- 
tion. In  either  case  the  responsibility  is  rightly  thrown 
upon  the  directors  who  are  entrusted  with  the  management 
of  the  corporate  affairs. 

3.  In  the  third  case  the  situation  is  somewhat  different. 
The  stockholders,  having  no  voice  in  the  ordinary-  affairs  of 
the  corporation,  are  not  in  a  position  to  know  whether  the 
laws  are  being  observed  or  violated.  Tlie  directors  are. 
Hence  any  loss  sustained  by  the  corporation  on  this  ac- 
count is  properly  thro^^^l  on  the  directors.  It  is  thus  their 
dut}^  to  know  the  legal  conditions  under  which  the  corpora- 


112  MAURICE  H.  ROBINSON 

tion  is  operated  and  to  see  that  its  business  is  conducted  in 
a  lawful  manner.  For  this  purpose,  all  corporations  need 
the  advice  of  competent  legal  counsel  and  the  larger  ones 
make  the  legal  department  an  essential  part  of  the  corpo- 
rate organization. 

4.  The  fourth  case  presents  greater  difficulties  in  prac- 
tice, although  it  is  in  theory  entirely  in  accordance  with 
the  principles  of  corporate  management.  Directors  are 
chosen  for  two  purposes:  First,  because  it  is  impracticable 
for  the  whole  body  of  stockholders  in  a  corporation  of  con- 
siderable size  to  participate  in  its  management — hence,  its 
management  is  entrusted  to  a  selected  few;  second,  it  is  or- 
dinarily expected  that  by  selecting  a  few  of  the  stockhold- 
ers to  act  as  managers  of  the  company,  a  higher  order  of 
business  capacity  and  judgment  may  be  secured.  It  is  on 
the  second  of  these  two  propositions  that  the  requirement 
that  the  directors  must  exercise  reasonable  care  and  good 
faith  in  the  conduct  of  the  corporate  business  rests.  Hav- 
ing been  selected  as  the  chosen  few  on  account  of  their  su- 
perior business  ability,  the  directors  are  properly  held  indi- 
vidually liable  for  indiscretion  in  business  policy  and  fraud 
in  actual  transactions. 

The  enforcement  of  this  principle  of  corporate  manage- 
ment is,  however,  full  of  difficulties.  It  is  not  easy  to  deter- 
mine in  advance  the  wisdom  of  all  questions  of  business 
policy,  and  to  throw  the  burden  for  losses  upon  the  directors 
when  they  acted  in  good  faith,  w^ould  hardly  appeal  to  the 
courts  of  equity.  Consequently,  it  is,  as  a  matter  of  fact, 
only  in  cases  of  actual  fraud  that  directors  are  ordinarily 
held  liable.  Here  the  case  is  clearer.  It  is,  of  course, 
sometimes  impossible  to  determine  where  the  responsibil- 
ity lies  even  in  such  cases,  but  usually  the  courts  have  been 
able  to  determine  the  facts  and  in  many  such  cases  to  hold 
the  guilty  directors  responsible  for  their  fraudulent  actions. 
Owing  to  the  difficulty  in  proving  fraud  it  is  ordinarily  pro- 
vided that  a  director  may  not  participate  in  corporate  ac- 


MODERN  BUSINESS  ORGANIZATION        113 

tion  in  case  of  contracts  in  which  lie  is  personally  inter- 
ested. In  view  of  the  difTficnlties  involved  in  the  enforce- 
ment of  the  liability  to  which  directors  are  subjected  for 
misnianao^ement  and  fraud,  it  is  undoubtedly  true,  as  has 
so  often  been  said,  that  the  best  safef]^uard  of  shareholders 
lies  in  the  choice  of  an  experienced  and  honest  board  of 
trustees. 

The  Corporate  Officers. 

The  officers  of  a  corporation  may  be  divided  into  two 
classes,  dependent  upon  their  relationship  to  the  corporate 
organization.  The  first  class  includes  those  whose  duties 
are  intimately  connected  with  the  affairs  of  the  corporation, 
the  second  class  those  whose  duties  are  connected  with  its 
external  operations.  Since  we  are  now  considering  the  or- 
ganization of  the  internal  affairs  of  the  corporation,  the 
duties  of  the  officers  included  Avithin  the  first  class  will  be 
treated  here  Avhile  those  of  the  second  class  will  be  con- 
sidered in  the  following  section. 

As  already  noticed,  certain  of  the  officers  of  a  corpora- 
tion are  considered  so  necessary  to  its  welfare  that  they 
are  usually  named  in  the  corporation  act  and  their  duties 
there  outlined,  for  the  purpose  of  prescribing  in  detail  the 
responsibilities  of  each  officer.  In  addition,  as  a  result  of 
judicial  decisions,  the  officers  of  a  corporation  are  subject- 
ed to  various  personal  liabilities  for  failure  to  perform  the 
duties  assigned  them  in  a  faithful  and  honest  manner.  Tlie 
corporate  officers  always  include  the  president,  the  vice- 
president  or  vice-presidents,  the  secretary  and  the  treasur- 
er. In  the  more  complex  corporations  there  are,  in  addi- 
tion, a  chairman  of  the  board,  an  executive  committee,  a 
general  counsel,  and  a  comptroller. 

Some  of  the  above  officers,  as,  for  example,  the  secretary", 
may  be  entirely  occuj^ied  with  duties  pertaining  to  the  cor- 
porate organization.    Others  may  serve  in  double  capac- 

B— II— 8 


114  MAURICE  H.  ROBINSON 

ity,  first  as  officers  of  the  corporate  organization,  and  sec- 
ond as  officers  of  the  operating  organization.  It  is  in  the 
former  capacity  that  we  are  now  considering  them.  The 
corporate  duties  of  each  of  the  above  officers  have  been 
described  in  the  section  on  the  by-laws.  It  is  the  purpose 
of  this  section  to  enumerate  the  personal  liabilities  to  which 
they  are  subjected  for  negligence  or  wrong  doing  in  con- 
nection with  their  official  duties. 

In  the  first  place,  under  the  common  law,  officers  of  the 
corporation  are  generally  liable  for  damages  resulting  from 
failure  to  properly  perform  their  duties  or  for  illegal  action 
of  any  kind.  This  subject  is  fully  treated  in  the  law  of 
officers  and  every  officer  of  a  corporation  should  be  thor- 
oughly informed  in  regard  to  his  liabilities  as  well  as  his 
duties.  In  the  second  place  the  corporation  acts  of  the 
several  states  add  certain  specific  liabilities  for  failure  to 
perform  certain  prescribed  duties. 

Among  the  more  important  of  these  prescribed  duties 
are  the  following: 

1.  Officers  are  required  to  keep  the  stock  and  transfer 
books  open  for  inspection  during  business  hours. 

2.  Officers  are  not  permitted  to  make  loans  to  any  offi- 
cer or  stockholder. 

3.  Officers  render  themselves  personally  liable  for  all 
debts  of  a  corporation  created  by  signing  false  certificates 
and  false  notes. 

4.  Officers  signing  false  certificates  render  themselves 
criminally  liable  for  such  action. 

5.  In  some  states  officers  tampering  with  the  entries 
in  books  of  account  and  other  corporate  records  are  de- 
clared guilty  of  forgery  and  subjected  to  the  penalties 
thereof. 


MODERN  BUSINESS  ORGANIZATION        115 

y.    ORGANIZATION  FOR  OPERATION. 

The  Proprietorship  and  the  Operating  Organization. 

Tlie  nature  of  the  ownership,  whether  individual  pro- 
prietor, the  partnership  or  the  corporation,  determines  in  a 
general  way  the  chief  characteristics  of  the  internal  organ- 
ization of  any  business  enterprise.  Every  business  organ- 
ization is,  however,  created  for  the  purpose  of  undertaking 
some  specific  phase  or  phases  of  the  industrial  or  commer- 
cial activities  of  the  coimtry  wherein  it  is  located.  The 
nature  of  those  activities,  while  affecting,  as  already  ob- 
served, the  character  of  the  internal  organization,  is  the  con- 
trolling factor  in  determining  the  general  features  and,  to  a 
somewhat  less  extent,  the  details  of  the  operating  organiza- 
tion. For  example,  a  cotton  factory  may  be  owned  and 
managed  by  an  individual  proprietor,  by  a  partnership,  by 
a  corporation,  or  by  a  co-operative  society.  The  character 
of  the  ownership,  however,  has  almost  no  influence  on  the 
working  or  operating  organization  of  the  factory.  Indeed, 
the  expert  operative  might  work  in  either  one  for  years  and 
never  know  which  form  of  organization  the  factory  was 
operating  under.  The  plant  would  show  no  material  differ- 
ence, the  machinery  would  be  practically  identical,  the  oper- 
ations would  be  carried  on  in  the  same  way  and  the  product 
turned  out  could  not  be  distinguished. 

General  Principles  of  Organization. 

The  operating  organization  being  determined  not  by 
the  ownership  but  by  the  character  of  the  work  undertak- 
en, it  follows  that  there  are  certain  general  principles 
which  underlie  the  organization  of  all  operating  business 
enterprises  and  that  these  general  principles  are  observ^ed 
by  all  well-manac:ed  enterprises  without  regard  to  their 
internal  organization.  The  more  important  of  these  gen- 
eral principles  are  as  follows : 


116  MAUEICE  H.  ROBINSON 

1.  The  executive  authority  should  be  centralized  in 
form  and  entrusted  to  one  individual  or  a  small  group  of 
individuals  working  under  definite  responsibility  but  pos- 
sessing considerable  freedom  in  the  choice  of  ways  and 
means. 

2.  The  operations  should  be  sub-divided  into  depart- 
ments, each  department  having  a  certain  specific  work  to 
do  and  in  its  work  subject  to  the  general  supervision  of  the 
central  executive  but  being  entirely  independent  of  every, 
other  department. 

The  Executive. 

In  the  individual  proprietorship  the  executive  ordina- 
rily is  the  proprietor  himself,  although  in  some  cases  the 
proprietor  employs  a  chief  executive  called  a  general  man- 
ager and  delegates  to  him  the  executive  functions.  In  the 
partnership  the  members,  jointly  and  severally,  usually 
act  as  the  chief  executive,  parcelling  out  the  functions 
among  themselves  or  entrusting  such  duties  to  one  of  their 
own  number  designated  as  managing  partner.  The  part- 
nership, however,  may  employ  a  general  manager  and  thus 
relieve  themselves  of  the  active  duties  of  the  management. 
In  the  corporation  the  executive  function  is  always  exer- 
cised by  a  selected  few,  sometimes  consisting  of  a  group  of 
persons  designated  as  an  executive  committee,  sometimes 
consisting  of  one  person  under  the  title  of  president.  In 
certain  cases  both  an  executive  committee  and  a  president 
are  provided  for  in  the  organization.  When  such  is  the  case 
the  executive  committee  is  the  supreme  executive  author- 
ity and  the  president  is  an  officer  of  the  executive  commit- 
tee, carrying  out  its  instructions  in  regard  to  the  general 
policy  and  having  considerable  discretion  in  regard  to  the 
actual  details  of  the  executive  duties. 

The  executive  thus  occupies  an  intermediate  position 
between  the  proprietorship  and  the  business  operations,  re- 
ceiving general  instructions  as  to  policy  from  the  proprie- 


MODERN  BUSINESS  ORGANIZATION        117 


torsliip  and  issuing  spcrifir  directions  to  the  several  heads 
of  departments  for  tlie  pnrpose  of  carrying  ont  the  general 
policy  into  practical  results.  This  relationship  may  he  il- 
lustrated by  the  following  table  which,  in  a  rough  way, 
shows  all  the  component  parts  of  a  complete  business  or- 
ganization. 


Ultimate 
Authority. 

Individual 
proprietcNr. 


Partnership. 


3.    Corporation. 


Co-operative 
society. 


General 

Policies. 

Individual 
proprietor. 


Partners. 


Stockholders 
and  directors. 


Society  and  the 
committee. 


Chief 
Executive. 

Individual 

proprietor 

or   General 

Manager. 

Partners, 
severally,  or 
Managing 
partner. 

Executive  com- 
mittee   or 
President. 

Executive  com- 
mittee or 
President. 


1 


f      Departments. 


Legal. 


H 


Accounting 


Purchasing 


Manufacturing 


Sales 


Transportation. 


^Vhile  the  character  of  the  chief  executive  varies  with 
the  nature  of  the  proprietorship  and,  to  a  less  extent,  with 
the  size  of  the  business  and  the  scope  of  its  operations,  in 
all  cases  this  office  has  one  feature  in  common,  namely,  its 
intermediate  position  as  the  medium  through  which  the  ul- 
timate authority  finds  expression  in  concrete  results 
through  the  operation  of  the  several  departments. 

The  Single  v.  the  Plural  Executive. 

Wliether  the  executive  shall  be  a  single  head  or  a  group 
of  individuals,  acting  as  one,  depends  largely  upon  circum- 
stances. In  the  individual  proprietorship,  the  executive 
head  ordinarily  is,  as  stated  above,  either  the  proprietor 
himself  or  a  general  manager  under  his  employment. 
While  not  customary,  it  is,  however,  possible  for  an  indi- 
vidual proprietor  to  entrust  the  executive  duties  connect- 
ed with  his  business  to  an  executive  committee  of  the  usual 


118  MAURICE  H.  ROBINSON  i 

size  and  standing  in  the  same  relationship  to  him  as  the 
executive  committee  of  a  corporation  stands  to  the  stock- 
holders and  directors. 

The  partnership,  on  the  contrary,^  usually  has  a  plural 
executive  head,  all  the  partners  participating  impartially  in 
the  executive  duties.  This  feature  of  the  partnership  is, 
as  is  well  known,  one  of  the  weaknesses  of  this  form  of  or- 
ganization and  this  fault  is  sometimes  corrected  by  the  ap- 
pointment of  one  of  the  partners  as  the  managing  partner. 
The  partners  then,  as  a  body,  formulate  the  general  policy 
and  the  managing  partner  carries  it  into  execution. 

The  corporation  formerly  always  had  a  single  executive 
head  in  the  person  of  the  president.  In  recent  years,  owing 
largely  to  the  complexity  of  the  work  conducted  by  the 
greater  corporations,  it  has  been  found  advisable  to  entrust 
the  executive  duties  to  a  committee  selected  from  the  direct- 
ors and  officers  and  to  make  the  president  the  head  of  this 
executive  committee.  The  executive  committee  then  de- 
cides on  the  more  important  questions  of  administration  and 
the  president  supervises  and  directs  the  work  of  the  several 
departments  each  of  which,  under  its  own  staff,  is  actively 
engaged  in  the  detailed  work  of  trade  and  industry.  In 
this  respect  the  co-operative  society  resembles  the  ordinary 
corporation. 

For  small  business  enterprises,  whatever  the  character 
of  the  internal  organization,  the  single  executive  head  pos- 
sesses marked  advantages  over  the  plural.  The  single  exec- 
utive is  able  to  act  promptly  and  thus  take  advantage  of 
opportunities  not  open  to  the  slowly  moving  executive  com- 
mittee. Furthermore,  in  the  partnership  with  several  part- 
ners, and  in  the  small  corporation,  the  directors  act  as 
an  executive  committee,  not  only  formulating  policies  but 
making  plans  for  their  prompt  and  efficient  execution.  In 
the  larger  corporations  the  executive  committee  system 
has  been  adopted  for  two  reasons:  First,  the  manage- 
ment of  such  business  enterprises  is  entirely  beyond  the 


MODERN  BUSINESS  ORGANIZATION        119 

capacity  of  any  one  man,  owing  partly  to  its  physical  extent 
and  partly  to  the  variety  of  o]:>orations  condnctecl,  and  sec- 
ond, the  executive  is  obliged  to  detenninc  questions  coming 
up  daily  of  so  great  moment  that  they  demand  the  combined 
judgment  of  several  men.  While  in  most  cases  the  decision 
of  the  one-man  executive  would  not  involve  the  company 
in  disaster,  it  is  the  exceptional  instances  that  must  be 
guarded  against.  The  executive  committee  system,  as  com- 
pared with  the  single  executive,  lacks  somewhat  in  prompt- 
ness of  execution  but  more  than  offsets  this  advantage  by 
the  unifoiTti  wisdom  of  its  decisions  on  important  ques- 
tions of  business  policy  and  business  practice. 

Responsibility  to  the  Proprietorship. 

The  chief  executive  is  in  theory,  and  should  be  in  prac- 
tice, either  directly  or  indirectly  responsible  to  the  ultimate 
authority,  that  is,  to  the  individual  proprietor,  the  partners, 
the  corporation  or  to  the  co-operative  societ}^  as  the  case 
may  be.  In  the  first  two  cases,  there  is  ordinarily  no  dif- 
ficulty in  this  respect.  In  the  corporation  and  the  co-opera- 
tive society,  however,  the  chief  executive  may,  in  practice, 
become  so  far  independent  of  the  authority  to  which  it  is 
responsible  as  to  present  entirely  new  problems  of  busi- 
ness management.  Tlie  following  statement  of  ^Ir.  Jacob 
H.  Schiff,  before  the  New  York  Legislative  Insurance  In- 
vestigating Committee  in  1905*  represents  an  extreme  case 
and  is  hardly  typical  of  the  situation  as  a  whole.  Still  it  is 
sufficiently  true  to  bear  repetition.    He  said: 

**The  system  of  directoi^hip  in  the  great  corporations  of 
the  City  of  Xew  York  is  such  that  a  director  has  practically 
no  power:  he  is  considered  in  many  instances,  and  T  may 
say  in  most  instances,  as  a  negligible  quantity  by  the  exec- 
utive officers  of  the  society;  he  is  asked  for  advice  when 
it  suits  the  executive  officers,  and  if  under  the  prevailing 
system  an  executive  officer  -washes  to  do  wrong,  or  wishes  to 

♦Report  Page  1000. 


120  MAURICE  H.  ROBINSON 

conceal  anything  from  his  directors,  or  commits  irregular- 
ities, the  director  is  entirely  powerless;  he  is  only  used  in  an 
advisory  capacity,  and  can  only  judge  of  such  things  as 
are  submitted  to  him.  Directors  are  of  very  little  use  ex- 
cept to  comply  with  the  formal  provisions  of  the  law." 

The  accuracy  of  Mr.  SchifE's  assertion  is  confirmed  by; 
the  fact  that  certain  capitalists  occupy  the  position  of  di- 
rector in  as  many  as  sixty  different  corporations,  while  at 
the  same  time  actively  engaged  as  president  or  manager  of 
the  same  or  other  similar  business  enterprises.  It  is  appar- 
ent that  where  an  individual  acts  as  a  director  in  many  en- 
terprises he  cannot  give  each  of  them  the  personal  attention 
that  is  necessary  to  insure  the  adoption  of  a  wise  business 
policy.  What  more  natural,  then,  than  that  he  should  look 
to  those  having  a  more  intimate  knowledge  of  the  com- 
pany's affairs  for  guidance  and  thus  the  directors  become 
the  servants,  and  sometimes  the  tools,  of  the  executive  of- 
ficers. Where  the  executive  officers  are  able  and  honest 
administrators,  the  affairs  of  the  corporation  suffer  no  harm, 
but  where,  as  in  some  cases,  such  persons  are  unwise,  selfish 
or  actually  dishonest,  the  stockholders  who  assmne  that 
their  rights  are  being  guarded  by  the  directors,  suffer  the 
consequences  in  the  ultimate  wreck  of  the  corporation. 

No  practical  remedy  for  this  condition  has,  as  yet,  been 
proposed.  It  would  seem  unwise  to  hasten  the  consolida- 
tion of  the  corporations  by  limiting  the  number  of  corpora- 
tions in  which  a  person  may  hold  directorships  and  yet  it 
might  be  better  to  have  fewer  and  larger  corporations  if  by 
so  doing  a  better  and  more  responsible  management  could 
thus  be  secured.  It  may  prove  advisable  to  require  direc- 
tors to  give  more  personal  attention  to  important  matters 
and  thus  secure,  in  an  indirect  way,  what  may  not  be  advis- 
able by  direct  methods.  It  is,  of  course,  true  that  each  di- 
rector entrusted  as  he  is  with  the  determination  of  the  im- 
portant questions  of  business  policy  ought  to  be  informed  in 
regard  to  the  financial  condition  of  the  corporation,  in  re- 


MODERN  BUSINESS  ORGANIZATION        121 

^ard  to  its  wage  system,  its  treatment  of  employes,  its 
priee  policy,  or  its  treatment  of  competitors,  as  well  as  its 
eaniinc^s  and  dividends.  The  average  director  is  too  often 
content  when  he  finds  the  dividend  rate  satisfactory  to  him- 
self and  the  other  stockholders. 

The  Functions  of  the  Executive. 

The  executive  has  two  main  functions:  First,  to  exe- 
cute the  general  policies  fonnulated  by  the  joroprietors  or 
the  direct  representatives  of  the  proprietors  of  the  enter- 
prise; and  second,  to  assist  the  management  in  the  process 
of  organizing  the  operation  of  the  company  into  depart- 
ments, each  with  its  own  specific  duties  and  responsibilities. 

1.  The  proprietors,  whether  individuals,  partners,  stock- 
holders or  members  of  a  co-operative  society,  under  the 
present  constitution  of  our  economic  institutions,  being  re- 
sponsil)le  for  the  failure  of  the  enterprise  which  they  con- 
trol, are  properly  expected  and  fonnally  authorized  to  de- 
teimine  the  character  of  the  work  to  be  undertaken,  the  use 
of  the  capital  invested,  and  the  general  problems  of  manu- 
facturing and  selling  the  goods.  Except  in  those  organiza- 
tions where  the  proprietor  and  the  executive  are  one  and 
the  same  person  or  group  of  persons,  it  is,  however,  mani- 
festly impossible  for  this  body  to  properly  supennse  the 
actual  execution  of  the  policy  which  has  been  fonnulated 
and  adopted. 

Tlie  executive  is,  therefore,  created  for  this  particular 
purjiose.  For  example,  the  directorate  of  a  corj^oration  has 
decided  to  make  an  addition  to  the  factory  at  a  cost  of  $1,- 
000,000.  The  executive  causes  plans  to  be  prepared,  pre- 
sents them  for  the  approval  of  the  directorate,  and  after 
such  approval,  superintends  the  erection  of  the  extension. 
Again,  the  directorate  has  decided  to  limit  the  output  of  the 
goods  manufactured  by  10  per  cent.  The  executive  takes 
the  necessary  steps  to  close  down  a  part  of  the  factory  or 
to  work  the  whole  force  fewer  hours.    In  still  another  case, 


122  MAURICE  H.  ROBINSON 

the  directorate  determines  that  it  is  wise  and  proper  to  in- 
crease the  dividend  rate  from  six  to  seven  per  cent.  The 
executive  makes  the  necessary  arrangements  for  the  pay- 
ment of  such  dividends  by  setting  aside  the  funds  and  send- 
ing out  the  dividend  checks. 

The  work  of  the  executive  is,  however,  not  confined  to 
carrying  into  operation  the  specific  directions  of  the  pro- 
prietors. In  many,  indeed  in  most,  cases  the  directors 
formulate  the  policy  of  the  corporation  in  general  terms  and 
under  such  circumstances  the  executive  is  expected  to  act 
upon  its  own  judgment  in  the  determination  of  ways  and 
means  by  which  the  policy  is  realized.  For  example,  a  cor- 
poration, through  its  directors,  has  decided  to  adopt  the 
policy  of  absorbing  its  competitors  wherever  and  whenever 
opportunity  offers.  The  executive  is  apprised  of  this  pol- 
icy and  its  function  is  then  to  secure  control  of  rival  com- 
panies by  the  most  appropriate  methods.  Thus,  a  consid- 
erable amount  of  discretion  must  always  be  entrusted  to  the 
executive  and  the  success  of  the  enterprise  will  depend 
largely  upon  the  wisdom  the  executive  displays  in  using  its 
liberty. 

The  executive  is,  of  course,  in  much  closer  touch  with 
the  actual  operation  of  the  enterprise  than  the  directors  or 
the  proprietor  and,  therefore,  in  addition  to  its  work  above 
described,  it  should  prepare  plans,  make  suggestions  and 
advise  the  adoption  of  such  policies  and  practices  as  in  its 
judgment  will  prove  conducive  of  the  welfare  of  the  com- 
pany. When  the  corporation  is  operating  in  many  lines 
and  especially  where  the  directors  are  not  only  actively  en- 
gaged in  business  for  themselves,  but  in  addition  sit  as  di- 
rectors on  many  other  boards,  this  particular  function  of  the 
executive  assumes  large  proportions.  Indeed,  in  many 
cases,  all  new  plans  and  propositions  for  the  improvement 
of  the  company's  position  habitually  and  normally  come 
from  the  executive  department.  Such  plans,  after  con- 
sideration and  adoption  by  the  responsible  managers,  will 


MODERN  BUSINESS  ORGANIZATION        123 

then  be  put  into  actual  operation  by  the  execntive  officers 
as  in  other  cases.  On  tlie  other  hand,  the  executive,  in  its 
turn,  relies  upon  the  ideas  and  su,2:j?estions  cominc^  from  the 
superintendents  of  factories  and  managers  of  departments 
and  it  is  customary  in  some  of  the  better  managed  business 
enterprises  to  offer  premiums  and  rewards  of  various  kinds 
for  suggestions  looking  toward  the  improvement  of  the 
company's  operations. 

2.  The  second  of  the  important  functions  of  the  execu- 
tive is  to  supei^rise  the  organization  of  the  operations  of  the 
company  into  departments,  to  appoint  the  official  heads  of 
each,  and  to  see  that  each  department  not  only  does  its  own 
work  effectively,  but  at  the  same  time  co-operates  with  the 
other  departments  with  which  it  comes  into  active  contact. 
In  this  work  there  are  two  general  methods  of  organiza- 
tion. Tlie  first  is  based  upon  the  character  of  the  work  per- 
fonned,  the  second  upon  geographical  location.  Tims,  for 
example,  the  American  Smelting  and  Refining  Company 
sub-divides  its  operations  into  three  grand  departments 
based  upon  economic  considerations,  namely,  the  purchas- 
ing department,  whose  duty  it  is  to  purchase  ores,  the  oper- 
ating department,  whose  duty  it  is  to  reduce  and  refine  ores, 
and  the  sales  department,  whose  duty  it  is  to  sell  the  fin- 
ished product.  At  the  same  time  the  plants  are  organized 
into  groups  based  upon  geographical  location.  For  ex- 
ample, the  Colorado  group  comprises  the  plants  located  in 
Colorado  and  vicinity  with  headquarters  at  Denver.  The 
southern  group  comprises  the  plants  in  Texas.  Arizona, 
New  Mexico  and  Mexico,  ^^ith  headquartei-s  in  the  City  of 
Mexico. 

Of  these  two  basic  principles  of  organization,  the  geo- 
gi'aphical  has  the  advantage  of  economizing  distance,  the 
functional  or  industrial,  the  work  of  supe^^^sion.  ^Yliere 
the  operations  are  widely  scattered  as  in  the  case  of  the 
smelting  company  just  mentioned,  the  geographical  basis 
must  be  observed  to  a  considerable  extent.     Thus,  wliile 


124  MAURICE  H.  ROBINSON 

the  corporation  organizes  its  work  into  purchasing,  refin- 
ing and  selling  departments,  it  at  the  same  time  makes 
nse  of  its  resident  managers  of  plants  to  act  as  local  agents 
of  the  purchasing  department,  thus  saving  the  expenses 
of  a  local  purchasing  agent.  Where,  however,  the  pur- 
chasing of  ores  becomes  of  especial  importance  a  resident 
agent  of  the  department  is  stationed. 

Owing  to  the  fact  that  most  of  the  large  corporations 
operate  plants  located  at  considerable  distance  from  each 
other,  and  at  the  same  time  maintain  purchasing  or  selling 
agencies  at  these  same  points,  it  is  usually  found  advisable 
to  follow  the  plan  adopted  by  the  smelting  company  and 
thus  to  a  certain  extent  use  both  principles  of  organization. 
In  such  cases  some  of  the  officers  serve  in  a  dual  capacity, 
w^orking  under  one  department  head  part  of  the  time  and 
under  another  the  remainder.  Thus,  while  the  manager  of 
a  plant  is  managing  the  reduction  of  ore  in  the  furnace,  he 
is  responsible  to  the  operating  department,  and  reports  to 
the  general  manager.  When,  however,  he  is  purchasing  ore 
he  is  responsible  to  the  purchasing  department  and  reports 
to  the  general  purchasing  agent.  Such  overlapping  of  de- 
partments is,  however,  directly  contrary  to  the  principle  of 
specialization  and  is,  therefore,  adopted  only  where  the 
work  of  one  department  is  not  sufficiently  important  to  oc- 
cupy the  full  time  of  an  officer  of  the  requisite  capacity. 

Functional  Organization. 

Wherever  possible,  the  management  finds  it  desirable  to 
organize  the  operating  activities  of  the  enterprise  on  the 
basis  of  the  character  of  the  work  which  is  being  performed. 
Consequently,  when  this  method  is  followed,  the  number  of 
departments  is  determined  by  the  extent  of  the  activities 
which  the  company  undertakes.  By  referring  to  the  sec- 
tion on  fundamental  principles  it  will  be  noticed  that  the 
industrial  and  commercial  activities  are  separated  natural- 
ly into  several  groups,  many  or  all  of  which  may  be  under- 


MODERN  BUSINESS  ORGANIZATION        125 

taken  by  a  particular  business  entei*prise.  If,  for  example, 
Avc  take  the  most  extensive  business  enterprise  known, 
iianicly,  the  United  States  Steel  Corporation,  we  find  that 
tliere  is  almost  no  phase  of  business  activity  which  it  is  not 
actually  undertaking  day  by  day,  and  on  examination  we 
iind  all  of  the  following  activities  with  the  corresponding 
departments  in  actual  operation: 

1.  The  legal  department. 

2.  The  accounting  department. 

3.  The  purchasing  department. 

4.  The  ore  and  coal  department. 

5.  Tlie  manufacturing  department. 

6.  The  sales  department. 

7.  The  traffic  department. 

All  of  these  departments  are,  it  will  be  obser^^ed,  the  in- 
strumentalities through  which  the  general  executive  con- 
ducts the  practical  operations  of  the  company.  All  of  them 
are,  therefore,  strictly  speaking,  subordinate  to  the  central 
authority.  They  differ  among  themselves  in  one  impor- 
tant particular,  however,  namely,  some  of  them  are  general 
departments,  being  connected  with  all  the  operations  of  the 
company,  while  others  are  what  may  be  called  special  de- 
partments, having  no  necessary-  connection  with  any  other 
branch  of  the  business.  In  the  tirst  group  are  the  legal  de- 
partment and  the  accounting  department.  In  the  second 
group  are  the  purchasing,  the  ore  and  coal,  the  manufiictur- 
ing,  the  sales  and  the  traffic  departments. 

The  Legal  Department. 

Since  every  business  enterprise  is  conducted  under  the 
laws  of  the  various  states  and  countries  in  which  it  operates, 
it  is  often  necessary  and  always  advisable  to  have  expert 
advice  on  the  rights  of  the  company  and  the  penalties  to 
which  it  subjects  itself  for  neglect  or  wilful  disregard  of 
the  law.  It  is  customary  for  smaller  companies  to  employ 
legal  counsel  as  conditions  majr  require.      In  man}^  cases 


126  MAURICE  H.  ROBINSON 

this  is  miieli  less  expensive  and  not  inconvenient.  For  the 
larger  enterprises  it  is,  of  course,  almost  a  necessity  to 
organize  a  legal  department  which  is  at  the  service  of  the 
general  executive  as  well  as  of  the  various  departments. 
The  legal  department  is  ordinarily  under  the  direction  of  a 
general  counsel  who  is  aided  hy  a  staff  of  assistants,  each  of 
whom  may  have  some  special  branch  of  the  law  or  of  the 
company's  work  under  his  immediate  care.  In  the  case  of 
railways,  public  service  corporations  and  other  companies 
having  intimate  relation  with  the  public,  the  legal  depart- 
ment is  of  very  great  importance. 

The  Accounting  Department. 

The  accounting  department  of  any  business  enterprise 
comprises  three  distinct  fields,  namely,  accounting  in  the 
limited  sense  of  the  word,  the  work  of  extending  credit,  and 
that  of  making  collections.  In  actual  practice  the  two  lat- 
ter fields  are  often  handled  directly  from  the  manager's  of- 
fice. It  is  evident,  upon  consideration,  that  the  extension 
of  credit  from  the  scientific  point  of  view,  is  primarily  based 
upon  accounting  data  and  a  competent  credit  man  must  first 
be  an  expert  accountant.  This  is  shown  by  the  fact  that 
whenever  the  credit  of  a  business  man  is  impaired,  the  ex- 
pert accountant  is  at  once  called  in  and  authorized  to  make 
an  examination  of  the  books.  Of  course,  other  factors,  such 
as  honesty,  habits,  etc.,  are  taken  into  account,  but  on  the 
whole,  credit  is  fundamentally  based  on  the  financial  condi- 
tion of  the  enterprise  and  the  financial  condition  is  shown 
by  the  accounts. 

In  collections,  the  connection  is  not  so  clear.  The  data 
used  in  the  collection  office  is  contained  wholly  in  the  ac- 
counts. To  maintain  a  department  of  collections  entirely 
distinct  from  the  accounts  necessitates  two  sets  of  accounts 
receivable,  one  in  the  general  accounts  and  one  for  the  de- 
partment of  collections.  By  making  the  work  of  collection 
a  branch  of  the  accounting  department,  such  duplication  is 


MODERN  BUSINESS  ORGANIZATION        127 

avoided.  ^Foroovor,  makiiic:  a  rollootinn  is  transferring'  an 
account  receivable  into  its  cash  equivalent,  or  in  cases  where 
the  full  account  cannot  be  collected,  into  part  cash  and  part 
forced  discount  resulting  in  a  loss.  Consequently  it  is  in 
accordance  with  recognized  principles  of  departmental  or- 
ganization, to  make  collections  a  branch  of  the  general  ac- 
counting department. 

The  Division  of  Accounts. 

The  object  of  accounting  is  to  secure  a  record  of  all  in- 
dustrial operations  and  business  transactions,  mathematic- 
ally and  economically  correct  in  form,  and  to  present  such 
data  in  summarized  statements  showing  the  cost  of  operat- 
ing each  department  and  the  net  profits  or  net  loss  result- 
ing from  each  and  from  the  business  as  a  whole.  Account- 
ing, then,  is  a  necessary  part  of  the  work  of  all  departments, 
and  hence  is  properly  classified  as  one  of  the  general  depart- 
ments of  a  business  enterprise. 

Notwithstanding  its  general  character,  it  is  possible  to 
conduct  this  work  through  the  several  departments,  each 
having  its  o^^Tl  accounting  division  and  each  accounting  di- 
vision being  entirely  independent  of  every  other.  Tlius  the 
manufacturing  department  may  keep  its  own  books  and  the 
other  departments  do  the  same.  The  system  of  department 
accounts  has  certain  advantages  among  which  the  more  im- 
portant are  the  special  knowledge  which  each  has  of  the 
technical  conditions  of  operation  and  consequently  the  bet- 
ter adjustment  of  the  accounts  to  the  actual  operations  con- 
ducted by  them.  Furthemiore,  this  system  is,  histoncally 
speaking,  the  natural  one  and,  accordingly,  in  those  busi- 
ness enterprises  w^hich  have  been  operating  for  a  consider- 
able period,  the  books  and  accounts  were  formerly  kept  in 
accordance  with  this  plan. 

Where  a  company  is  so  small  as  to  have  only  one  depart- 
ment, or  a  few  at  most,  with  no  very  marked  lines  of  sep- 
aration among  them,  it  is,  of  course,  obvious  that  no  separa- 


128  MAURICE  H.  ROBINSON 

tion  of  the  accounting  would  be  desirable.  Where  the 
enterprise  is  an  extensive  one,  however,  comprising  many 
departments  and  often  many  separate  plants,  the  organi- 
zation of  the  accounting  work  may  conform  to  either  one 
of  those  types  described  above.  While  the  departmental 
system  is,  owing  to  its  historic  origin,  more  largely  em- 
ployed, still  the  rapid  adoption  of  the  central  accounting 
system  by  the  more  progressive  corporations  indicates  that 
it  has,  on  the  whole,  marked  advantages  over  the  depart- 
mental system  and  that  such  advantages  are  likely  to  se- 
cure its  general  adoption  in  the  immediate  future.  The 
central  accounting  system  has  the  following  advantages  to 
recommend  its  adoption :  First,  it  facilitates  comparisons ; 
second,  it  maj^,  therefore,  be  used  to  enforce  discipline  and 
stimulate  efficiency;  third,  it  enables  the  cost  of  production 
to  be  more  accurately  estimated;  fourth,  it  insures  that  all 
of  the  accounts  will  be  brought  together  and  thus  show  the 
results  of  the  whole  enterprise  as  a  unit. 

1.  Until  within  the  last  half  century,  almost  all  business 
enterprises  were  small  in  extent  and  simple  in  their  organi- 
zation and  operation.  Each  enterprise  was  operated  in 
close  competitive  relationship  with  others  of  the  same  type. 
Consequently,  the  comparison  of  one  establishment  with 
another  was  easy  and  each  proprietor  and  each  workman, 
by  observation,  was  constantly  making  such  comparisons 
and  noticing  the  relative  standing  of  each  enterprise. 
With  the  development  of  business  establishments  with 
many  departments  this  method  of  comparison  has  obviously 
become  impossible.  Hence,  the  desirability  of  compari- 
sons made  through  the  accounting  department  and  on  this 
account  the  desirability  of  uniform  methods  of  accounting 
in  order  to  make  such  comparisons  of  value.  Such  compari- 
sons are,  of  course,  particularly  desirable  when  one  com- 
pany operates  several  departments  of  essentially  the  same 
character. 

2.  It  is  obvious,  of  course,  that  maintaining  discipline 


MODERN  BUSINESS  ORGANIZATION        129 

and  seourincc  ciricicncy  through  the  rivalry  of  competing 
esta])lishiiients  of  the  same  character  plays  an  ii]i])ortant 
part.  Wliero  the  competing  estahlislmiciils  are  l)i'anches 
of  great  enterprises  of  unlike  character,  such  rivalry,  how- 
ever, loses  force,  and,  consequently,  there  arises  the  ne- 
cessity of  suhstituting  some  other  means.  Of  these,  one 
of  the  most  effective  is  the  comparison  of  results  as  sho^\Ti 
by  accounts  kept  on  a  uniform  basis.  This  is  known  in 
business  enteri^nses  as  the  "deadly  parallel."  The  origin 
of  the  system  is  apparently  unknown.  It  is,  however,  a 
well-known  fact  that  the  comparisons  of  results  by  means 
of  the  accounts  were  used  by  the  Carnegie  Company  with 
man^elous  results  to  maintain  discipline  and  secure  effi- 
ciency, almost  from  the  beginning  of  that  com]')any's  ex- 
istence. Since  its  original  adoption  its  main  features  have 
been  widely  adopted  by  most  of  the  larger  companies  and 
by  many  of  the  smaller  ones.  "When  the  accounts  are  con- 
trolled by  each  department  it  is,  of  course,  practicable  to 
use  the  comparative  method  as  between  the  branehes  of 
the  department.  But  it  is  only  where  the  accounts  are 
under  the  control  of  a  central  accounting  department  that 
it  is  possible  to  compare  the  work  of  one  department  with 
that  of  another  with  any  degree  of  accuracy. 

3.  It  is  common  to  have  three  sets  of  records:  Fii*st, 
the  cori^oratiou  accounts  showing  the  general  balance  sheet 
and  the  general  profit  and  loss  account;  second,  the  depart- 
mental books  showing  the  work  of  each  and  the  corpora- 
tion's relation  with  debtors  and  creditors;  and  third,  a  fac- 
tory cost-accounting  section  under  the  control  of  the  manu- 
facturing department.  The  first  two  are  usually  very  closely 
connected.  The  latter  often  has  no  direct  C(mnecti()n  with 
either  of  the  others  except  as  its  gencu'al  results  are  incorjio- 
rated  in  the  general  books.  The  object  ot*  tin;  cost-account- 
ing section  of  the  factory  department  is  to  keep  a  record 
of  the  time  of  employes,  of  materials  used,  and  of  the  cost 
of  factory  superintendence.     From  the  factory  accounts, 

B— II— 9 


130  MAURICE  H.  ROBINSON 

the  cost  of  manufacturing  the  various  articles  produced 
is  calculated,  and  to  this  is  added  what  is  found  to  be  the 
ordinary  or  average  cost  of  selling  the  same.  A  third  ele- 
ment is  then  added,  sometimes  called  the  overhead  ex- 
penses, sometimes  the  burden,  sometimes  the  indirect  ex- 
pense. This  latter  cost  is  usually  figured  as  a  percentage 
of  the  manufacturing  cost,  and  is,  under  the  department 
method  of  accounting,  always  more  or  less  of  a  guess. 

It  is  obvious,  of  course,  that  the  cost  of  manufactur- 
ing an  article  is  the  sum  of  several  elements  each  of  which 
is  necessary  to  its  production  and  each  of  these  elements 
ought  to  be  calculated  on  the  same  general  system  and 
should  be  brought  together  as  a  sum  rather  than  any  one 
being  detemiined  as  a  per  cent  of  any  other.  When  the 
accounts  are  under  the  general  control  of  a  central  account- 
ing department  this  plan  is  not  only  advisable  but  it  is 
the  natural  one.  The  central  department  finds  that  the 
average  factory  cost  of  manufacturing  a  certain  article  is 
$25,  that  the  average  cost  of  selling  the  same  under  ordi- 
nary conditions  is  $5,  and  that  the  share  of  the  general 
expenses  of  administration  is  $1.  The  total  cost  found  by 
independent  means  is  then  $31.  This  gives  those  in  charge 
of  the  price-making  a  reasonable  basis  for  action,  an  ele- 
ment which  is  largely  lacking  under  the  departmental  sys- 
tem of  accounts. 

4.  The  business  success  of  any  enterprise,  whether 
composed  of  one  department  or  many  distinct  departments, 
is  determined  by  the  results  of  the  operations  as  a  whole. 
Where  the  accounts  are  controlled  by  the  individual  de- 
partments, the  tendency  is  to  emphasize  the  success  of  the 
particular  departments  rather  than  of  the  whole  company. 
Where  the  accounts  are  controlled  by  a  central  accounting 
department  directly  under  the  general  executive,  the  tend- 
ency on  the  contrary  is  to  emphasize  the  business  enter- 
prise as  a  whole  and  to  treat  each  branch  as  a  factor  in  a 
co-operative  enterprise  whose  greatest  success  is  attained 


MODERN  BUSINESS  ORGANIZATION        131 

by  fiirtlicrin,^:  tlie  success  of  tlie  whole  organization, 
^foreovor,  the  central  system  assures  that  the  accounts 
from  all  branches  will  be  brou^^^ht  top^ether  on  a  uniform 
basis  and  that  consequently  the  officers  in  charge  will  al- 
ways have  before  them  for  their  guidance  the  financial 
results  of  the  entire  enterprise. 

Tlie  central  system  of  accounts  then  mphasizes  the 
co-operative  nature  of  the  business  where  there  are  many 
departments  and  assures  that  the  department  accounts  will 
be  made  up  on  the  same  principles  and  that  all  accounts 
will  finally  be  brought  together  into  one  general  summary 
showing  the  success  or  failure  of  the  institution  as  a  unit. 
This  result  is  in  itself  sufficiently  important  to  justify  the 
central  system  of  accounts. 

AAliether  a  department  of  accounts  should  be  under  the 
control  of  a  general  comptroller  of  accounts  or  of  a  com- 
mittee of  accounts  is  a  question  whose  answer  depends 
upon  the  circumstances  in  specific  cases.  At  the  present 
time  the  one-man  head  is  quite  general,  although  not  uni- 
vei'sal.  Tlie  committee  system  has  many  advantages;  it 
assures  that  the  general  system  of  accounts  shall  be  com- 
parative in  character,  that  the  technical  conditions  in  each 
department  shall  be  properly  considered  and  that  the  claims 
of  no  one  department  vnll  be  overemphasized.  "Wliere 
the  general  charge  of  the  department  is  in  the  hands  of  a 
committee  on  accounts,  it  is  ver^^  desirable  to  have  the  ac- 
tual work  of  administration  in  the  hands  of  a  single  exec- 
utive who  may  be  designated  as  the  comptroller  of  accounts. 
In  the  larger  companies  he  should  have  one  or  more  as- 
sistants wnth  power  to  act  in  his  absence.  Tlie  work  of  the 
department  should  then  be  divided  into  sections  corre- 
sponding to  the  organization  of  the  company,  each  section 
being  under  the  control  of  an  accountant  directly  respon- 
sible to  the  comptrollpr.  Thus,  there  would  be  a  chief  ac- 
countant for  the  purchasing  department,  one  for  the  man- 
ufacturing department,  one  for  the  sales  department  and 


132  MAURICE  H.  ROBINSON 

so  on  with  each  of  the  others.  The  accounts  from  the  sev- 
eral departments  would  then  be  brought  together  in  the 
general  office  on  a  uniform  basis  and  show  the  operations 
of  the  company  as  a  whole. 

The  Division  of  Credits. 

The  investigations  made  in  1896  for  the  Director  of  the 
Currency,  and  in  1910  for  the  National  Monetary  Commis- 
sion, by  Professor  David  Kinley,  indicate  that  over  95  per 
cent  of  all  the  wholesale  business  in  the  United  States  is 
paid  by  checks  and  that  in  the  retail  trade  about  70  per 
cent  of  the  sales  are  made  in  the  same  way.  These  sta- 
tistics, while  not  absolutely  complete  for  the  w^hole  coun- 
try, show  in  a  general  way  the  importance  of  the  credit 
man  in  modern  business  enterprises.  Credit  exists  wher- 
ever an  interval  of  time  intervenes  between  the  receipt 
of  goods,  whether  materials,  money  or  services,  and  the 
payment  for  them.  To  determine  to  whom  to  extend  cred- 
it, the  amount  of  the  same,  and  the  length  of  time  particu- 
lar cases  may  properly  be  allowed  to  run,  is  the  function 
of  the  credit  department  of  a  business  enterprise.  The 
credit  department  then,  by  its  very  nature,  limits  the  ac- 
tivities of  the  manufacturing  and  the  sales  departments 
since  its  approval  must  be  secured  before  any  goods  may 
be  sold  on  account.  It  is,  moreover,  in  close  connection 
with  the  legal  department,  since  the  advice  of  a  lawyer  is 
necessary  and  accounts  not  collectible  in  the  ordinary  way, 
are,  as  a  last  resort,  turned  over  to  the  legal  department 
for  forced  collection.  In  the  granting  of  credit  two  im- 
portant questions  must  be  answered  in  the  affirmative: 
First,  is  the  business  enterprise  financially  able  to  meet 
its  obligations,  including  those  being  considered  by  the 
credit  department?  Second,  are  the  managers  in  control 
of  said  enterprise  desirous  of  meeting  their  obligations  at 
the  specified  dates'? 

In  order  to  answer  the  first  question  the  credit  man- 


MODERN  BUSINESS  ORGANIZATION        133 

ager  must  bo  skilled  in  two  fields,  namely,  that  of  accouut- 
injr  and  that  of  industrial  and  connncreial  conditions.  To 
meet  these  demands  Mr.  nig^inl)otham  in  his  l)ook  called 
*''riu'  Makinu^  of  a  Merchant"  suc:,t,^ests  that  a  credit  man 
should  be  born  a  farmer's  son  and  work  up  to  the  credit 
office  through  the  local  bank  or  country  store;  that  he 
should  supplement  this  experience  by  a  period  in  the  ac- 
counting ofhce  of  the  merchant  or  manufacturer.  lie  will 
then  be  qualified  to  appreciate  local  conditions  of  the  the 
enterprise  asking  credit  and  thus  detennine  the  consum- 
ing capacity  of  its  constituency;  furthermore,  he  will  be 
trained  in  accounts  and  will  know  what  details  to  ask  for 
and  be  a  judge  of  the  financial  status  of  the  prospective 
customer. 

The  second  question  presents  more  difficulties.  Indeed 
it  is  impossible  to  answer  in  some  cases  and  in  most  others 
there  must  always  remain  a  shadow  of  doubt.  A  man's 
willingness  to  meet  his  just  obligations  is  so  much  a  matter 
of  heredity,  of  custom,  of  circumstances,  that  no  scientific 
basis  of  detennining  the  answer  to  this  question  has  been 
found.  Hence  the  successful  credit  manager  must,  in  addi- 
tion to  his  knowledge  of  commercial  conditions  and  ac- 
counts, be  an  expert  reader  of  human  character  and,  as 
Mr.  Higginbotham  further  states,  act  in  individual  cases 
on  intuition,  rather  than  upon  reason.  In  explanation  of 
this,  ^Ir.  Higginbotham  says:  "If  the  case  were  analyzed 
thoroughly  it  would  be  found  that  the  intuition  is  but  the 
impression  gained  from  a  kind  of  sub-conscious  reasoning." 
This  line  of  argument  has  led  to  the  oft-repeated  statement 
that  a  real  credit  man  is  born,  not  made,  as  thouc^h  the 
reading  of  character  is  a  peculiar  gift  to  the  few.  The 
credit  man  is,  according  to  this  view,  one  of  the  ** fore-or- 
dained." The  facts  seem  to  indicate  that  while  some  men 
may  have  peculiar  aptitude  for  a  credit  man's  work  just 
as  some  men  take  to  the  law,  or  to  the  ministry,  any  man 


134  MAURICE  H.  ROBINSON 

of  good  capacity  may  be  trained  to  judge  credits  as  readily 
as  any  other  field  of  human  activity. 

In  addition  to  the  means  mentioned  above,  namely,  the 
financial  status  of  the  applicant  for  credit,  his  character 
and  his  habits,  the  credit  man  has  two  important  sources 
of  information  both  of  which  admirably  supplement  the 
work  of  his  office.  The  first  is  the  experience  of  other 
houses,  the  second  the  services  of  mercantile  agencies  of 
which  Dun's  and  Bradstreet's  are  representative. 

Every  purchaser  seeking  credit  is  ordinarily  dealing 
with  many  houses  and  when  he  mshes  to  open  credit  re- 
lations with  another  house  the  latter  has  a  valuable  source 
of  information  in  those  companies  from  whom  the  appli- 
cant has  been  purchasing  on  credit.  It  is,  however,  not 
considered  good  taste  to  obtain  such  information  from  one's 
direct  competitors.  This  situation  is  unfortunate,  for  there 
is  no  one  better  fitted  to  give  such  information,  and  in  some 
cases  the  dealer  is  engaged  in  handling  one  line  of  goods 
exclusively.  It  has  been  found  by  experience  that  com- 
petitors cannot  be  trusted  to  give  their  rivals  uncolored 
reports  and  therefore  this  kind  of  information  is  usually 
sought  through  houses  selling  non-competitive  goods.  In 
more  recent  years,  however,  there  has  been  a  growing  tend- 
ency to  use  this  valuable  means  of  information  to  supple- 
ment the  other  sources. 

The  mercantile  agencies  are,  as  has  been  suggested,  the 
really  important  source  of  outside  information.  Some  of 
these  agencies  operate  in  a  limited  territory.  Some  cover 
the  ci^dlized  world.  Some  are  operated  independently  of 
the  business  enterprises  for  whom  they  get  information. 
Some  are  maintained  on  a  co-operative  basis  by  such  insti- 
tutions. Whatever  the  territory  or  system,  the  mercantile 
agency  attempts  to  get  all  the  facts  that  tend  to  show  the 
financial  strength  and  the  sfeneral  trustworthiness  of  indi- 
viduals, firms  and  corporations  seeking  credit.  These  agen- 
cies publish  periodically  the  information  which  they  get 


MODERN  BUSINESS  ORGANIZATION        135 

and  in  addition  make  special  reports  for  their  clients  Tvhen- 
evor  such  are  desired.  The  mercantile  agency  is  itself  a 
nKxst  excellent  illustration  of  business  organization  on  an 
innnense  scale  and  is  worthy  of  study  from  this  viewpoint 
alone.  To  imdertake  such  a  study  here  would,  however, 
lead  us  too  far  afield. 

The  credit  department,  then,  when  properly  organized, 
is  a  branch  of  the  accounting  department  and  is  under 
the  immediate  charge  of  the  chief  credit  man.  Under  the 
chief  credit  man  are  assistant  credit  men  of  co-ordinate 
authority,  the  number  being  determined  by  the  scope  of 
the  credit  business.  Under  the  assistant  credit  men  are 
a  sufficient  number  of  clerks  and  errand  boys  to  perfonn 
such  services  promptly  and  efficiently. 

It  is  indispensable  for  the  success  of  the  credit  depart- 
ment that  each  of  the  assistant  credit  men  have  a  large 
amount  of  individual  discretion.  This  is  a  direct  result 
of  the  peculiar  character  of  the  credit  man's  task.  He 
must,  as  suggested,  read  character,  in  addition  to  industrial 
conditions  and  to  accomplish  this  delicate  task  successfully 
he  must  come  in  direct  contact  with  the  applicant  for  credit. 
Moreover,  he  cannot  transfer  his  thoughts  or  impressions 
to  his  superiors.  Consequently  he  must  decide  the  ques- 
tion directly  rather  than  report  to  a  superior  for  final  de- 
cision. The  organization  of  the  credit  department  is,  there- 
fore, exceedingly  simple  and  the  position  of  the  credit  man 
is  at  once  one  of  the  most  important  and  one  of  the  most 
sought  for  among  all  business  openings. 

The  Division  of  Collections. 

If  the  work  of  the  credit  department  has  been  success- 
fully done  the  collections  occasion  no  trouble.  If  the  re- 
verse is  true  this  department  becomes  of  extreme  impor- 
tance. Hence,  the  intimate  relationship  of  these  two 
branches  of  work  in  the  organization  of  the  business  enter- 
prise.   It  is  obvious  from  the  above  considerations  that  the 


136  MAt;RICE  H.  ROBINSON 

collection  department  may  be  either  co-ordinate  with  the 
credit  department  or  a  subdivision  of  the  same.  In  either 
case,  however,  the  two  must  work  in  haiTnony  for  the  best 
results.  In  the  smaller  enterprise  it  would  seem  more  nat- 
ural and  more  economical  to  make  the  collections  a  part 
of  the  credit  division,  organizing  a  branch  for  this  purpose. 
In  the  larger  enterprise  it  is  usual  to  create  a  division 
of  collections,  either  independent  of  the  credit  division 
and  directly  under  the  general  executive,  or  co-ordinate 
with  the  same  and  directly  under  the  general  department 
of  accounts.  The  latter  is  more  in  accordance  with  the  best 
principles  and  practices  of  organization  and  for  these  rea- 
sons it  has  been  adopted  in  this  treatise  as  the  ideal  plan. 
The  actual  organization  of  the  collection  division  de- 
pends, of  course,  largely  upon  its  work.  In  some  cases  the 
collections  are  made  through  the  traveling  salesmen  who 
are  made  responsible  for  the  amounts  which  they  sell.  This 
method  has  many  disadvantages  and  is,  therefore,  employed 
only  among  business  enterprises  covering  a  large  territory. 
In  some  cases  the  collection  department  turns  the  accounts 
over  to  an  agency  which  collects  upon  a  percentage  basis. 
This  is  a  convenient  plan  where  the  accounts  are  scattered 
over  considerable  territory  and  especially  where  the  goods 
are  sold  on  credit  through  correspondence.  By  making 
collections  for  a  large  number  of  clients  at  the  same  time 
the  expenses  are  greatly  reduced  and  consequently  the  col- 
lection agency  is  in  a  position  to  receive  a  suitable  com- 
pensation for  its  work.  Wherever  the  accounts  are  suffi- 
ciently concentrated  within  a  limited  area  it  is  desirable 
for  each  company  to  collect  its  own  bills  and  consequently 
to  maintain  a  complete  collection  department.  The  greater 
part  of  the  work  of  this  department  consists  of  statements 
sent  through  the  mails,  and  the  care  of  remittances  received 
in  answer  to  such  statements.  In  case  of  persistent  neglect 
this  method  is  usually  supplemented  by  personal  visits 
from  the  representatives  of  the  department.    When  the 


MODERN  BUSINESS  ORGANIZATION        137 

latter  fails,  forced  collection  through  legal  procedure  is 
the  last  resort.  Every  ^vell-managed  esta])liHhmeut,  how- 
ever, reserves  this  method  for  the  exceptional  cnses  and 
tlien  oidy  after  a  tliorough  investigation  of  the  conditions 
relating  to  such  neglect. 

The  Purchasing  Department. 

The  importance  of  the  i)urchasing  department  vaiies 
with  the  nature  of  the  husiness  and  with  the  extent  to 
which  the  process  of  integration  has  been  carried.  A  mer- 
cantile establishment  ordinarily  purchases  all  of  the  goods 
which  it  sells,  and  consequently  its  purchasing  department 
is  of  equal  importance  with  that  of  sales.  In  a  manufac- 
turing enterprise  the  situation  is  quite  different.  Some 
manufacturers  own  their  own  mines,  forests,  quarries,  and 
other  raw  materials,  and  in  such  cases  the  purchasing  de- 
partment is  of  minor  importance,  if  it  exists  at  all.  In 
most  cases,  however,  manufacturing  enterprises  jjurchase 
the  larger  projDortion  of  their  materials  in  the  open  market, 
and  under  such  circmnstances  the  purchasing  department 
is  of  the  utmost  importance  to  the  success  of  the  company. 
For  the  United  States  as  a  whole  it  was  shown  by  the 
Census  of  1900  that  for  every  dollar  received  for  the  sale 
of  products,  the  manufacturers  as  a  class  paid  out  for  ma- 
tei-ials  approximately  55  cents,  or  somewhere  over  t^^'ice 
the  amount  which  was  paid  for  wages. 

The  work  of  the  purchasing  department  of  a  manufac- 
turing company  naturally  divides  into  three  branches: 
First,  raw  materials  and  partially  finished  products;  sec- 
ond, finislied  materials  for  the  extension  or  improvement 
of  buildings  and  machinery;  and  third,  current  su])plics. 
On  account  of  this  natural  division,  it  is  often  customary 
to  give  the  purchasing  department  authority  over  the  last 
division  only,  while  the  manufacturing  department  pur- 
chases its  raw  materials  directly  and  the  general  executive 
has  charge  of  all  purchases  for  new  buildings  or  new  ma- 


138  MAURICE  H.  ROBINSON 

chinery.  In  such  cases  the  purchasing  bureau  of  the  manu- 
facturing department  is  in  reality  the  most  important 
branch  of  the  purchasing  division.  This  system  is  being 
rapidly  superseded  by  the  installation  of  a  general  purchas- 
ing department,  responsible  to  the  chief  executive. 

The  purchasing  department  is  usually  under  the  con- 
trol of  a  general  purchasing  agent,  assisted  by  deputy  pur- 
chasing agents  for  the  several  branches  above  mentioned. 
In  addition  to  the  purchases,  this  department  often  has 
charge  of  the  storage  of  the  goods  purchased  until  they 
are  wanted  by  the  factory  or  the  sales  room.  In  such  cases 
the  stores  division  of  the  purchasing  department  is  under 
the  control  of  a  chief  stores  clerk,  or  stores  manager,  who 
receives  goods  from  the  purchasing  department,  and  holds 
them  until  they  are  issued  to  the  several  departments  upon 
requisitions  properly  authorized  by  the  departments  which 
receive  them. 

The  purchasing  department  has  two  special  duties: 
First,  to  purchase  goods  only  upon  proper  authorization; 
and  second,  to  make  such  purchases  on  the  most  advanta- 
geous terms.  The  importance  of  the  first  of  these  duties 
is  often  overlooked.  Each  department  of  a  company  is 
especially  interested  in  its  own  wants;  consequently,  when 
a  department  purchases  for  itself,  the  volume  of  its  wants 
is  likely  to  be  overestimated.  Furthermore,  the  depart- 
ment system  of  purchasing  facilitates  graft  and  fraud  in 
at  least  two  ways:  The  department  officers  may  purchase 
materials  and  use  the  same  for  their  own  private  purposes; 
or  they  may  purchase  the  goods  of  other  enterprises  in 
which  they  are  personally  interested  at  excessive  prices, 
thus  bleeding  the  company  by  whom  they  are  employed  for 
the  sake  of  dividing  among  themselves  the  illegal  gains. 
The  introduction  of  the  general  purchasing  agent  has  tend- 
ed to  check  unnecessary  purchases  and  to  make  this  spe- 
cies of  graft  generally  impracticable.  When  requisitions 
for  materials  and  supplies  are  required  to  go  through  the 


MODERN  BUSINESS  ORGANIZATION        139 

general  purcliasinc:  agent's  office,  the  departments  are  not 
only  more  earefnl  in  making  sneli  requisitions,  l)nt  are 
likely  to  he  held  up  if  their  requisitions  are  uiireasonahle 
in  quantity,  or  quality,  and,  moreover,  unless  the  purchas- 
ing agent  is  in  collusion  with  the  heads  of  the  several  de- 
partments, he  has  no  personal  motive  to  purchase  from  the 
companies  in  which  such  heads  are  interested,  and  there- 
fore, he  is  not  likely  to  favor  such  practices. 

It  will  be  suggested,  however,  that  the  purchasing  agent 
may  himself  be  a  grafter  and  use  his  position  to  place  con- 
tracts and  purchase  supplies  with  companies  willing  to 
share  the  graft  with  him.  Tlie  practical  difficulties  involved 
in  this  method  of  securing  illegal  gains  are,  however,  so 
great  as  to  prevent  its  general  use.  In  this  case  the  depart- 
ment heads  find  the  business  of  their  departments  grow- 
ing less  and  less  profitable  while  at  the  same  time  they  have 
no  opportunity  to  share  in  the  profits  arising  from  the  con- 
tracts made  by  the  purchasing  department.  Accordingly, 
on  account  of  the  poor  showing  which  they  are  making, 
they  find  their  salaries  are  likely  to  be  cut  by  the  general 
executive,  or  they  may  be  discharged  altogether.  It  is 
therefore  for  their  personal  advantage  to  keep  in  close 
touch  with  the  work  of  the  purchasing  department  and 
to  notify  the  general  executive  when  it  seems  probable 
that  the  purchases  are  being  fraudulently  made.  Tliis 
check  upon  graft  is  supplemented  by  the  work  of  the  cen- 
tral accounting  department,  through  whose  office  all  pur- 
chases must  go.  Wliile  it  is  not  to  be  supposed  that  the 
accounting  department  is  to  act  chiefly  as  a  detective,  it 
is  one  of  its  duties  to  see  that  all  purchases  are  regularly 
made  and  the  prices  attached  are  reasonable  and  fair. 

The  general  purchasing  department  is  especially  impor- 
tant in  the  case  of  those  business  enterprises  that  have 
plants  located  at  several  different  points  or  have  branches 
which  use  the  same  kind  of  materials.  Under  such  cir- 
cumstances the  general  purchasing  department  is  in  a  po- 


140  MAURICE  H.  ROBINSON 

sition  to  combine  the  orders  of  all  of  the  plants  or  all  of 
the  branches  and  thus  not  only  to  secure  better  terms,  but 
also  to  save  appreciably  on  the  cost  of  transportation.  This 
saving  is  of  so  much  importance  that  retail  stores  handling 
the  same  kind  of  goods  and  located  in  the  same  general 
section  of  the  country  find  it  of  advantage  to  combine  their 
several  purchasing  departments  into  one  general  purchas- 
ing agency.  Sometimes  this  is  accomplished  through  the? 
controlling  interest  of  some  one  man,  as  the  Besse  Fur- 
nishing Goods  Stores  in  southern  New  England,  and  some- 
times the  organization  takes  the  form  of  a  corporation  in 
which  the  several  stores  hold  stock  in  proportion  to  their 
annual  purchasing  power,  as  the  New  York  Mercantile 
Company,  operating  in  connection  with  the  purchasing  de- 
partments of  a  group  of  stores  located  in  the  North  Central 
States.  Whatever  the  form,  the  centralization  of  the  pur- 
chases of  the  several  branches  of  the  same  company  or  of 
several  business  enterprises  is  for  the  purpose  of  buying 
the  goods  at  lower  rates  or  on  more  advantageous  terms. 
The  work  of  the  purchasing  department  requires  the 
union  of  two  elements  or  two  kinds  of  skill  not  commonly 
found  in  any  one  man,  namely,  an  extensive  experience 
and  knowledge  of  markets  and  prices,  and  also  an  intimate 
knowledge  of  raw  materials,  of  the  processes  of  manufac- 
turing, and  of  finished  goods.  Owing  to  the  peculiar  de- 
mands upon  the  purchasing  department,  it  is  usual  in  large 
enterprises  to  divide  it  into  bureaus  or  branches,  each  of 
which  has  charge  of  the  purchasing  of  some  one  kind  of  ma- 
terials or  of  goods.  At  the  head  of  each  of  these  bureaus  is 
a  head  buyer,  with  a  sufficient  corps  of  assistant  buyers  to 
carry  on  the  work  of  the  office.  This  gives  opportunity  for 
individuals  having  a  special  technical  training  to  use  their 
knowledge  of  materials  and  prices  to  the  best  advantage. 
It  then  becomes  the  special  function  of  the  general  pur- 
chasing agent's  office  to  direct  the  activities  of  the  buyers 
m  regard  to  market  conditions  and  prices  while  special 


MODERN  BUSINESS  ORGANIZATION        141 

buyers  give  special  attention  to  tlie  qualities  of  the  goods 
which  they  are  purchasing. 

The  Ore  and  Coal  Department. 

The  ore  and  coal  department  of  an  extensive  manufac- 
turing enterprise  resembles  an  independent  mining  com- 
pany except  in  the  following  points:  First,  it  is  under  the 
control  of  the  general  executive;  and  second,  it  does  not 
ordinarily  sell  its  products  to  a  general  market,  but  fur- 
nishes them  on  orders  from  the  manufacturing  department. 
Consequently  the  head  of  this  department  is  directly  re- 
sponsible to  the  executive  committee  or  the  president,  and 
therefore  is  occupied  with  the  technical  work  of  opera- 
ting the  mines  rather  than  with  formulating  the  business 
policy  of  the  department.  It  is  therefore  desirable  that 
the  manager  of  this  department  should  be  an  expert  on 
mining  operations  and  that  his  assistants  should  have  the 
same  general  training.  Second,  since  the  ore  and  coal  de- 
partment does  not  sell  its  products,  it  requires  no  selling 
bureau.  Furthei-more,  its  accounts  are  taken  care  of  by 
the  general  accounting  department.  Its  only  purchases  are 
supplies,  and  these  are  bought  through  the  general  pur- 
chasing department,  hence  the  organization  of  this  division 
is  detemiined  almost  entirely  by  operating  conditions. 
Tliis  simplifies  the  problem  and  permits  the  em]ihasis  to 
be  laid  uj^on  technical  efficiency  rather  than  upon  business 
ability. 

In  turning  over  the  materials  to  the  manufacturing  de- 
partment, two  methods  of  charging  for  the  same  are  in 
general  use.  The  first  method  is  to  charge  the  cost  of  the 
materials  or  as  near  the  cost  as  can  be  conveniently  ascer- 
tained. The  second  method  is  to  charge  the  market  price. 
In  the  first  case  the  operation  of  the  coal  and  ore  depart- 
ment will  show  neither  a  profit  nor  a  loss.  Tlie  accounts 
will,  however,  always  show  the  average  cost  of  jDroduction. 


142  MAURICE  H.  ROBINSON 

This  is,  of  course,  liigWy  desirable,  but  such  computations 
can  be  provided  for  under  the  second  system.  The  ]atter 
has  the  advantage  of  sho\Ying  the  financial  status  of  its 
department  as  it  would  appear  were  it  an  individual  busi- 
ness establishment,  and  thus  has  the  effect  of  stimulating 
the  general  manager  and  his  assistants  to  show  an  actual 
profit  at  the  end  of  each  season.  In  this  way  the  depart- 
ment has  the  appearance  of  being  independent  although 
really  under  the  control  of  the  general  executive. 

"Whether  a  manufacturing  company  ought  to  own  its 
own  mines  and  forests  and  thus  supply  directly  the  raw 
material  which  it  uses  is  a  question  of  business  manage- 
ment that  admits  of  an  answer  only  in  specific  cases.  For 
a  small  manufacturing  establishment  to  own  and  operate 
such  subsidiary  companies  is  ordinarily  impracticable. 
For  the  larger  enterprises,  however,  the  ownership  of  the 
raw  materials  often  has  many  advantages.  In  the  first 
place,  the  manufacturers  are  thus  able  to  get  the  materials 
at  cost;  second,  they  are  able  to  get  them  when  they  want 
them  and  in  the  proper  quantities;  third,  they  may  thus 
prevent  the  monopolization  of  certain  raw  materials  and 
hence  assure  themselves  of  a  supply  at  a  reasonable  price; 
fourth,  they  may  thus  avoid  the  necessity  of  an  expensive 
purchasing  department,  since  their  materials  are  furnished 
upon  orders  to  the  departments  furnishing  such  supplies. 

These  and  other  advantages  which  occur  in  specific  cases 
have  been  sufficiently  important  to  induce  the  larger  iron 
and  steel  mills,  some  of  the  railroads,  manufacturers  of 
furniture,  matches,  and  other  lines,  to  purchase  mines  and 
forests  with  sufficient  capacity  to  supply  a  considerable 
part  of  their  needs.  Some  retailers  of  clothing  also  manu- 
facture their  own  goods,  although  this  method  has  not  been 
so  generally  successful  as  has  been  the  case  in  the  iron, 
steel,  coal,  and  lumber  business. 


MODERN  BUSINESS  ORGANIZATION        143 

The  Manufacturing  Department. 

Under  tlie  most  highly  organized  form  of  business  ad- 
ministration the  manufacturing  department  is  assigned  a 
]')i'oi)orly  located,  well-arranged,  sufficiently  lighted  factory. 
This  building  is  equipped  with  the  best  machiner}^  obtain- 
able and  the  general  sujDerintendent  is  authorized  to  em- 
ploy a  sufficient  number  of  assistants  and  w^orkmen  to  carry 
on  the  processes  with  the  utmost  efficiency.  The  legal  de- 
partment fui*nishes  advice  on  matters  of  law  whenever 
necessary,  the  books  are  under  the  direction  of  the  account- 
ing department,  the  goods  are  bought  through  the  pur- 
chasing department,  and  are  sold  through  the  sales  de- 
partment. The  work  of  the  manufacturing  department  is 
thus  exclusively  technical  in  character  and  is  entirely  sepa- 
rated from  the  business  or  commercial  activities  of  the 
company.  Its  organization,  therefore,  may  be  developed 
upon  strictly  scientific  lines,  based  upon  the  character  of 
the  products  manufactured,  and  planned  with  the  single 
jDurpose  of  securing  the  greatest  possible  efficiency  in  pro- 
duction. The  branches  of  this  department  will,  of  course, 
vaiy  greatly  in  detail,  but  nevertheless  all  possess  certain 
features  in  common  which  makes  a  general  summary  of 
this  branch  of  the  organization  possible. 

1.  The  manufacturing  department  of  any  company  is 
usually  under  the  direction  of  a  general  superintendent, 
directly  responsible  to  the  central  executive  authority. 
Since  his  duties  and  responsil)ilities  are  confined  to  the 
work  of  manufacturing,  his  ciualifications  must  be  deter- 
mined by  the  kind  of  goods  which  is  produced.  Thus, 
a  company  manufacturing  chemical  materials  and  prepara- 
tions requires  the  ser^nces  of  an  expert  chemist  as  super- 
intendent: a  company  manufacturing  furniture,  an  expert 
cabinet-maker;  a  company  making  books,  an  experienced 
printer  and  book-binder.  These  technical  qualifications 
while  necessaiy  are,  however,  not  sufficient.    The  efficiency 


144  MAURICE  H.  ROBINSON 

of  the  factory  must  always  depend  largely  iipon  tlie  or- 
ganizing ability  of  the  superintendent,  and  consequently 
this  officer  must  in  addition  to  his  technical  qualifications 
possess  at  least  in  average  measure  the  second  qualifica- 
tion. Technical  ability  in  the  special  field  of  manufactur- 
ing undertaken  by  the  enterprise  and  a  fair  degree,  at  least, 
of  the  organizer's  genius  are  the  two  indispensable  quali- 
fications of  the  factory  superintendent. 

As  a  technical  expert,  the  superintendent  should  per- 
sonally or  through  his  immediate  office  force  take  direct 
charge  of  the  following  matters:  The  inspection  of  pro- 
cesses and  goods  in  the  process  of  manufacture;  methods 
and  means  of  stimulating  efficiency;  the  general  oversight 
of  tools  and  machinery;  the  care  of  supplies  and  materials; 
as  the  authority  in  direct  charge  of  the  shop  organization, 
he  should  have  supervision  of  the  time-keeping  system 
and  the  allotment  of  work  to  the  several  branches  of  his 
department;  the  wage  sj^stem  and  the  stimulation  of  effi- 
ciency among  the  various  sections  of  the  factory;  the  main- 
tenance of  discipline;  the  sanitary  conditions  of  the  fac- 
tory; and  the  inter-relationship  of  the  various  branches; 
in  short,  the  superintendent  is  obliged  to  take  direct  and 
personal  charge  of  all  matters  which  cannot  be  convenient- 
ly managed  through  the  sub-divisions  of  his  organization. 
On  the  other  hand,  the  superintendent,  especially  in  the 
larger  organizations,  is  compelled  to  entrust  to  subordinate 
organizations  all  functions  which  are  specifically  within  the 
field  which  they  individually  occupy. 

2.  Every  manufacturing  department  except  the  most 
simple  in  character  may  ordinarily  with  very  great  ad- 
vantage be  sub-divided  into  branches  or  sections,  and  in 
such  cases  some  or  all  of  the  following  divisions  will  be 
found  necessary,  and  all  will  usually  be  found  desirable: 

(1)  The  testing  and  experimental  laboratory. 

(2)  The  designing  and  drafting  room. 


J 


MODERN  BUSINESS  ORGANIZATION        145 

(3)  The  power  i)laut. 

(4)  Tlio  tool  room 

(5)  The  shop. 

(1)  The  Testing  and  Experimental  Laboratory  is  a  di- 
rect outc^rowth  of  the  ai)plication  of  scientilie  methods  to 
the  practical  art  of  manufacturing.  On  this  account  it 
is  a  recent  development,  and  consequently  is  just  begin- 
ning to  make  its  influence  felt.  The  function  of  this  divi- 
sion of  the  manufacturing  department  is  to  test  materials 
for  strength  and  dural)ility  under  various  conditions  and 
thus  to  determine  in  advance  of  use  their  adaptability  for 
specific  purposes.  For  example,  in  the  erection  of  a  thirty- 
story  business  block  the  load  which  a  given  beam  must 
carry  may  be  determined  by  mathematical  j^rocesses.  In 
the  testing  laboratory  it  is  easy  to  find  whether  a  steel 
beam  of  a  particular  quality  and  structure  will  bear  the 
burden  which  is  to  be  imposed  upon  it.  In  this  way  manu- 
facturers are  able  to  guarantee  their  work,  thus  promot- 
ing their  own  business  success  at  the  same  time  tliat  they 
are  i^rotecting  the  interests  of  society  as  a  whole.  In  the 
same  way  the  durability  of  wire  rope,  of  hemp  cordage, 
of  steel  and  iron  rails,  of  natural  and  prepared  wood  for 
railroad  ties,  of  brick  and  pavement  of  all  kinds,  are  tested 
and  their  wearing  qualities  ascertained  in  advance  of  their 
manufacture  on  a  large  scale.  The  usefulness  of  the  labo- 
ratoi-y  in  the  newer  fields  of  manufacture,  as,  for  example, 
electricity  and  chemistry,  can  hardly  be  overestimated. 
In  many  cases  scientific  institutions  and  expert  scientists 
have  led  the  way,  but  in  practically  all  cases  manufactur- 
ers undertaking  the  newer  fields  of  business  enterprise  are 
practically  forced  to  establish  and  maintain  a  testing  and 
experimental  laboratory  in  tlieir  own  works. 

This  division  should  l)e  under  the  immediate  direction 
of  an  expert  in  this  particular  kind  of  work,  and  he  should 
be  aided  by  a  sufficient  number  of  trained  assistants  to 

B  — II— 10 


146  MAURICE  H.  ROBINSON 

properly  conduct  the  tests  and  experiments.  It  is  obvious 
that  he  must  possess  a  considerable  degree  of  liberty  in 
regard  to  the  methods  employed,  and  that  the  laboratory 
must  be  supplied  with  the  best  equipment  that  the  market 
affords. 

(2)  The  Designing  and  Drafting  Room.  This  branch  of 
the  shop  organization  is  necessary  in  all  manufacturing 
plants  where  plans  or  models  are  required.  It  is  under 
the  direction  of  a  chief  draftsman,  directly  responsible  to 
the  superintendent.  The  chief  draftsman  is  assisted  by  a 
sufficient  number  of  subordinates  to  supply  all  drawings, 
sketches,  blue  prints,  and  other  working  designs  for  fac- 
tory use.  This  division  should  also  provide  for  the  storage 
of  all  patterns  and  designs  and  arrange  them  in  a  methodi- 
cal way  so  that  they  will  be  readily  accessible  whenever 
they  are  wanted  for  use. 

(3)  The  Power  Plant.  Manufacturing  establishments 
usually  find  it  desirable  to  furnish  the  power  which  they 
use  in  the  shops  through  their  own  power  plant.  In  all 
such  cases  the  work  of  providing  power  is  properly  sepa- 
rated from  the  rest  of  the  factory  organization  and  en- 
trusted to  a  separate  division.  The  power  plant  is  then 
placed  under  the  direction  of  a  mechanical  engineer,  who 
is  often  designated  by  the  title  of  assistant  superintendent. 
He,  with  his  assistants,  has  charge  of  the  boilers,  pumps, 
engines,  generators,  motors,  etc.,  used  for  moving  appa- 
ratus and  propelling  machinery.  This  division  has  imme- 
diate charge  of  all  engineers,  firemen,  oilers,  watchmen,  and 
is  expected  to  see  that  the  machinery  is  kept  in  running 
order  and  that  power  is  furnished  to  the  departments  when- 
ever wanted.  The  supplies  for  this  division  are  obtained 
from  the  store  room  upon  requisition  from  the  superin- 
tendent's office.  The  chief  mechanical  engineer  not  only 
supervises  the  operation  of  the  power  plant,  but  in  the 
well-managed  establishment  is  expected  to  suggest  im- 
provements in  design,  more  economical  methods  of  furnish- 


MODERN  BUSINESS  ORGANIZATION        147 

ing  power,  and  in  case  of  extensions  and  improvements 
to  supervise  the  plans  for  the  erection  of  additions  to  the 
plant.  He  thus  occupies  an  extremely  responsible  position, 
and  should  be  able  to  provide  power  at  the  least  possible 
cost  under  the  particular  circumstances  in  which  the  fac- 
tory is  working. 

(4)  The  Tool  Room.  Everj^  business  enteri^rise  operat- 
ing a  factory  uses  a  variety  of  tools  and  it  has  been  found 
economical  to  organize  a  branch  to  provide  tools,  store  them 
in  convenient  rooms  when  not  in  use,  and  issue  them  on 
requisitions  for  particular  shops  and  on  particular  jobs. 
Tlie  tool  room  is  usually  under  the  direct  charge  of  a  fore- 
man, reporting  directly  to  the  assistant  superintendent  in 
charge  of  the  power  plant  and  tool  room.  This  arrange- 
ment is  a  convenient  one  in  small  companies,  but  in  large 
ones  the  tool  room  is  of  sufficient  imjDortance  to  be  inde- 
pendent of  any  other  branch  of  the  manufacturing  and 
should  therefore  be  a  separate  division,  directly  under  the 
general  superintendent. 

In  issuing  tools,  it  is  necessary  to  specify  with  con- 
siderable accuracy  the  job  for  which  the  tools  are  to  be 
used,  in  order  that  the  tool  expense  of  the  company  may 
be  properly  apportioned  to  the  various  jobs  and  thus  en- 
able the  accounting  department  to  calculate  accurately  the 
cost  of  making  any  particular  piece  of  work.  Where  tools, 
dies,  etc.,  are  made  especially  for  use  on  the  particular  job 
and  have  no  prospective  future  use,  the  total  expense  of 
the  same  should  be  charged  to  the  job  for  which  they  were 
made.  In  other  cases,  the  time  in  use  on  each  job  should 
be  kept  and  the  charge  for  the  tools  be  made  on  the  basis 
of  their  normal  life. 

(5)  The  Shop.  The  number  of  shops  and  the  size  and 
arrangements  of  each  are  matters  that  are  governed  by 
the  nature  of  the  work  and  the  character  of  the  enterprise. 
Each  shop  is,  however,  devoted  to  one  particular  kind  of 
work  and  is  almost  universally  under  the  immediate  charge 


148  MAURICE  H.  ROBINSON 

of  a  foreman,  reporting  directly  to  the  superintendent,  or 
in  some  establishments  to  an  assistant  superintendent 
whose  especial  duty  it  is  to  supervise  the  work  of  the  shop 
division. 

The  foreman  must,  it  is  obvious,  be  a  man  skilled  in 
the  technical  side  of  the  work  of  his  shop.  He  should  know 
how  much  work  an  employe  working  at  a  fair  rate  of  speed 
is  able  to  accomplish  in  a  given  time,  and  be  able  to  secure 
the  best  work  of  which  his  men  are  capable.  He  must  also 
see  that  the  jobs  are  properly  apportioned  so  that  the  men, 
tools,  and  machinery  are  kept  regularly  employed.  It  is 
also  the  duty  of  the  foreman  to  see  that  the  time  slips  are 
properly  checked  and  thus  assist  the  accounting  depart- 
ment in  its  efforts  to  determine  the  actual  cost  of  manu- 
facturing each  of  the  various  articles  which  are  being 
turned  out. 

The  foremen  are  assisted  by  the  bosses,  who  are  imme- 
diately above  the  workmen  and  in  some  cases  take  part  in 
actual  manual  labor.  The  bosses  are  divided  into  two  main 
classes — those  having  charge  of  particular  kinds  of 
work,  as  the  washing  boss  or  the  riveting  boss,  and  those 
having  charge  of  particular  shops,  called  job  bosses.  In 
addition  it  is  sometimes  found  desirable  to  sub-divide  the 
duties  still  further  and  appoint  a  man  called  the  speed  boss, 
to  see  that  the  machines  are  run  at  proper  speed,  and  an- 
other called  the  inspection  boss,  to  see  that  the  work  in 
process  is  of  standard  quality. 

Finally,  in  each  of  the  shops  are  the  workmen,  who, 
under  the  direction  of  the  foremen  and  bosses,  take  the  ma- 
terials, use  the  tools  and  machinery,  and  turn  out  the 
finished  product  in  conformity  with  the  designs  and  plans 
prepared  in  the  drafting  room.  Each  laborer  in  a  well- 
organized  shop  has  a  specific  task  to  do  and  it  is  the  func- 
tion of  the  general  authorities  to  see  that  the  workmen 
are  not  only  skilled  in  their  particular  work,  but  that  each 
department  and  each  branch  has  its  proper  allotment,  so 


MODERN  BUSINESS  ORGANIZATION        149 

that  aP  arc  kept  unil'onuly  employed  and  no  dei)artnient 
is  ()])lin:ed  to  "svait,  owinix  to  the  failure  of  the  ]ir('C('(lin£f 
department  to  get  its  work  out  on  time.  In  addition  to  the 
skilled  laborers,  who  cannot  readily  he  shifted  from  one 
kind  of  work  to  another,  there  is  always  a  group  of  gen- 
eral laborers,  or  utility  men,  who  assist  in  the  non-technical 
work  wherever  needed. 

The  Sales  Department. 

The  sales  department  is  that  branch  of  a  business  en- 
terprise through  which  the  goods  are  marketed.  It  there- 
fore includes  the  following  branches: 

(1)  Advertising.  (3)  Selling. 

(2)  Estimating.  (4)  Ordering. 

Tlie  sales  department  as  a  whole  may  be  under  the 
immediate  control  of  either  the  general  sales  agent  or  a 
sales  committee,  responsible  in  their  turn  directly  to  the 
general  executive.  The  single  head  in  the  person  of  a  gen- 
eral sales  agent  is  the  usual  form.  As  stated  in  connec- 
tion with  certain  other  departments,  the  conunittee  sys- 
tem has  been  meeting  with  most  excellent  results  in  many 
lines  of  business  during  the  past  decade.  AMiether  the 
single  head  or  the  committee  system  is  used,  each  of  the 
four  branches  should  be  organized  by  itself  and  have  its 
own  official  staff.  We  shall  now  consider  each  of  these  in 
their  order. 

(1)  Advertising.  The  advertising  division  includes  all 
of  the  means  thrctugh  which  the  business  enterpi-ise  seeks 
to  retain  and  extend  its  market.  The  work  is  under  the 
immediate  direction  of  an  advertising  manager,  aided  in 
the  larger  companies  by  assistant  managers,  each  having 
charge  of  some  important  branch  of  the  business.  In  the 
^liddle  Ages  advertising  was  conducted  chiefly  through  the 
display  of  goods  and  wares  at  fairs  and  in  the  market 
places.     This  method  is  still  of  great  imiDortance,  as  is 


150  MAURICE  H.  ROBINSON 

shown  by  the  international  expositions,  the  national  food, 
stock,  and  land  shows,  and  the  local  fairs  at  which  the 
manufacturers  and  merchants  display  their  goods.  In  mod- 
em times  the  fairs  have  taken  a  secondary  place  and  the 
really  important  methods  are  either  personal  solicitation 
or  display  advertising  through  letters,  circulars,  posters, 
window  dressing,  and  periodical  literature.  Under  the 
first  head  is  included  all  methods  by  which  the  seller  at- 
tempts to  reach  the  buyer  by  personal  exploitation.  In 
this  division  the  traveling  salesman  is  easily  the  most  im- 
portant. The  demonstration  of  foods  and  wares,  though 
of  lesser  value,  is  in  the  case  of  new  commodities  one  of 
the  best  avenues  through  which  the  consumer  is  reached. 
Finally  we  have  the  free  distribution  of  samples  through 
personal  visitations. 

In  all  of  these  cases  the  attempt  is  made  to  reach  the 
purchaser  directly  and  influence  him  to  buy  a  specific  class 
of  goods  or  a  specific  article.  There  is  thus  danger  of  eco- 
nomic loss  from  two  sources:  First,  much  time  is  wasted  in 
seeking  those  who  really  want  the  goods;  and  second,  ow- 
ing to  the  direct  personal  contact,  the  retailer  is  often  load- 
ed down  with  goods  which  he  cannot  sell  and  the  ultimate 
consumer,  with  goods  which  he  cannot  use.  For  these  rea- 
sons, there  has  been  a  decided  tendency  in  recent  years  to 
employ  display  advertising  wherever  such  means  of  pub- 
licity are  adaptea  to  the  particular  case  in  hand.  The  ob- 
ject of  display  advertising  is  to  create  a  general  demand 
for  the  goods,  and  consequently  this  form  appeals  particu- 
larly to  the  manufacturer,  who  is  thus  rendered  partially 
independent  of  the  middleman  in  the  selling  of  his  prod- 
ucts. To  strengthen  their  position  in  connection  with  this 
kind  of  advertising,  manufacturers  adopt  trade-marks  and 
trade  names  and  thus  establish  a  species  of  good-will  some- 
what akin  to  that  which  is  attached  to  a  merchant's  good 
name. 

Display  advertising  is  often  very  general  in  character 


MODERN  BUSINESS  ORGANIZATION        151 

callinc:  attention  to  tlie  quality  of  tlic  goods,  but  omitting 
any  reference  to  the  place  Avhere  tlicy  may  be  obtained. 
Such  advertising  is,  of  course,  used  chiefly  by  the  manu- 
facturers. In  other  cases,  specific  articles  are  named,  the 
prices  are  given,  and  the  place  where  they  may  be  obtained 
is  noted.  This  foiTti  of  display  advertising  is  used  chiefly 
by  retailers  of  all  classes. 

Display  advertising  employs  either  the  press,  the  circu- 
lar, and  the  catalog,  or  out-door  signs  of  various  kinds. 
In  the  first  class  are  found  the  daily  and  weekly  newspaper, 
the  monthly  magazine,  the  trade  journal  and  periodicals 
covering  a  special  field,  such,  as  those  devoted  to  out-door 
life  or  athletic  sports.  In  the  second  class  is  the  ordinary 
circular,  the  almanac,  the  calendar,  and  the  regular  trade 
catalogs.  In  the  mail-order  business  the  catalog  is,  of 
course,  indisj^ensable,  while  in  all  fields  it  is  of  growing 
importance  as  a  result  of  the  tendency  to  standardize  the 
quality  and  design  of  goods.  In  the  third  class  there  are 
sign  boards,  posters,  electric  signs,  and  street  car  displays. 
Tlie  value  of  the  methods  included  in  this  class  depends 
largely  upon  the  density  of  the  population  and  the  charac- 
teristics of  the  purchasing  public.  In  a  highly  educated 
community  the  out-door  sign  is  largely  thrown  away.  The 
same  is  true  of  the  poster  and  street-car  advertisement. 
The  electric  sign  often  fails  for  the  same  reason,  although 
it  usually  has  the  merit  of  directing  the  purchaser  to  the 
place  where  the  article  wanted  may  be  found. 

Tlie  function  of  the  advertising  manager  is  first,  to 
choose  the  media  through  which  the  purchaser  is  to  be 
reached;  second,  to  outline  the  plan  of  campaign;  third, 
to  organize  and  direct  his  assistants  in  their  work;  and 
finally,  to  trace  the  relationship  between  the  advertising 
and  its  results  in  actual  or  prospective  customers. 

(a)  In  the  choice  of  a  medium,  the  advertising  manager 
should  be  guided  by  the  kind  of  goods  which  he  wishes  to 
sell  and  the  character  of  the  constituency  to  which  he  ai> 


152  MAURICE  H.  ROBINSON 

peals.  In  connection  with  tlie  first  of  these  conditions  he 
may  easily  consult  the  technical  expert,  whose  advice  will 
enable  him  to  call  attention  to  the  mechanical  perfection 
of  the  articles  he  is  advertising.  For  the  second  he  must 
rely  upon  his  knowledge  of  sociological  conditions,  and  in 
most  cases  he  must  be  guided  chiefly  by  experience.  Hav- 
ing determined  the  above  points,  he  is  in  a  position  to  choose 
the  medium,  whether  circular,  poster,  electric  sign,  period- 
ical, one  or  all.  When  the  most  general  appeal  to  the  pub- 
lic is  desired,  all  media  may  be  selected.  Where  the  appeal 
is  made  to  a  particular  class,  a  technical  or  special  journal 
will  usually  be  found  most  appropriate. 

(b)  The  campaign  may  be  either  short  and  striking  or 
long  and  persistent,  depending  again  largely  upon  the  char- 
acter of  the  goods  to  be  sold.  Where  the  goods  are  to  be 
regularly  manufactured  for  a  long  period,  it  is  obvious  that 
either  plan  may  be  adopted.  AMiere  they  are  sold  once  for 
all,  there  is  no  alternative — the  former  must  be  chosen. 
This  accounts  for  the  nature  of  the  advertising  in  connec- 
tion with  the  sale  of  certain  issues  of  stock,  especially  where 
the  promotion  of  the  enteri3rise  is  characterized  by  ques- 
tionable practices.  The  policj^  of  continuous  advertising 
is  much  more  in  accordance  with  the  teachings  of  both 
sociology  and  psychology.  It  is  the  continual  dripping  that 
wears  away  the  stone,  and  it  is  the  constant  and  unremit- 
ted advertising  of 's  Soap  and 's  Clothes  that 

attracts  the  attention  of  the  purchaser  to  their  merits.  In 
many  cases  it  has  been  found  by  actual  experience  that 
the  purchasing  public  ceases  to  buy  almost  immediately 
after  the  advertisements  are  withdrawn.  It  is  often  true 
that  continual  advertising  is  the  price  of  business  success. 

(c)  The  number  of  assistant  managers  and  of  clerks 
in  th3  advertising  manager's  office  depends  entirely  upon 
the  nature  of  the  campaign,  and  is  likely  to  vary  somewhat 
from  season  to  season.  For  this  reason  many  business  en- 
terprises find  it  desirable  to  employ  an  advertising  man- 


MODERN  BUSINESS  ORGANIZATION        153 

a^er  only  and  contract  ont  the  advertising  thronj^li  one  of 
the  many  regnhir  advertisinc^  agencies  that  ai-e  at  their 
service.  Since  the  advertising  of  different  manufacturers 
and  merchants  varies  from  season  to  season,  tlic  advertis- 
ing agency  is  in  a  position  to  keep  its  force  regidarly  em- 
ployed througliout  the  entire  year.  In  this  way  it  is  often 
an  economy  to  employ  the  advertising  agency  rather  than 
to  maintain  one.  Moreover,  the  wide  experience  of  the 
advertising  agency  in  promoting  the  sale  of  other  classes 
of  goods  is  at  the  service  of  the  manufacturer  employing 
this  means  of  securing  publicity.  Again,  the  advertising 
agency  regularly  contracts  for  a  given  amount  of  space  in 
various  periodicals,  on  the  billboards,  and  in  the  various 
street  cars,  and  tlierefore  by  subletting  the  space  to  va- 
rious advertisers  as  their  needs  demand,  it  secures  an  addi- 
tional saving.  Wherever  the  advertising  is  conducted 
through  circulars  and  catalogs,  there  is  usually  a  saving  to 
have  the  work  done  in  the  advertising  dei)artment  rather 
than  through  the  agency. 

(d)  To  determine  the  results  of  the  advertising  in  actual 
sales  is  no  easy  matter  in  any  case,  and  impossi])le  in 
certain  cases.  The  process  by  which  such  results  are  esti- 
mated is  called  ** keying."  While  the  methods  of  keying 
differ,  they  are  all  alike  in  one  point,  namely,  in  their  at- 
tempt to  coiTelate  the  answers  to  advertisements  with  ])ar- 
ticular  media.  In  some  cases  this  is  accomplished  1)y  gi\ing 
different  addresses  in  different  periodicals  for  the  same  ad- 
vertisement. In  others,  all  those  who  reply  to  a  certain  ad- 
vertisement are  required  to  address  Department  A,  B,  etc. 
In  others,  a  coupon  is  provided  which  the  prospective  cus- 
tomer is  required  to  cut  out,  sign,  and  return.  The  pe- 
riodicals usually  assist  the  keying  of  advertisements  by  re- 
questing their  readers  to  mention  their  name  in  replying  to 
the  advertisements  appearing  in  their  columns.  Wlierever 
the  advertising  manager  uses  only  one  method  of  advertis- 
ing and  the  goods  are  new,  the  results  of  his  campaign  are 


154  MAURICE  H.  ROBINSON 

readily  ascertained.  As  the  campaign  progresses  it  is,  of 
course,  plain  that  a  considerable  portion  of  the  sales  come 
from  the  recommendations  of  satisfied  customers.  The 
greater  the  number  of  media,  the  greater  the  difficulty  of 
tracing  the  relationship  which  actually  exists  between  ad- 
vertising and  sales. 

Where  the  appeal  is  made  in  a  general  way,  it  is  obvi- 
ously impossible  to  ascertain  anything  more  than  the  rela- 
tionship of  the  money  expended  in  the  campaign  to  the 
general  results  in  increased  sales,  and  whenever  business 
conditions  are  fluctuating  on  account  of  general  commercial 
conditions,  this  relationship  must  be  corrected  for  errors 
due  to  this  particular  cause. 

(2)  Estimating.  This  branch  of  the  sales  depart- 
ment is  necessary  only  where  goods  of  various  kinds  and 
qualities  are  made  to  order.  It  therefore  has  no  regular 
place  in  commercial  houses  and  in  those  manufacturing  es- 
tablishments where  the  goods  made  are  of  standard  design 
for  the  general  trade.  Where  goods  of  special  design  are 
made  to  order,  the  bureau  of  estimates  cannot  be  dispensed 
with.  Its  purpose  is  to  determine  in  advance  the  ap- 
proximate cost  of  making  a  particular  kind  of  goods,  vary- 
ing in  character  from  a  specially  designed  gas  engine  to  a 
thirty-story  office  building  in  one  of  the  great  cities.  The 
cost  thus  ascertained  is  used  for  the  purpose  of  making  the 
price,  and  hence  the  bureau  of  estimates  is,  in  the  case  of 
manufacturers  producing  goods  of  special  design,  one  of 
the  important  branches  of  its  work  and  organization.  An 
incompetent  or  careless  bureau  of  estimates  is  in  a  position 
to  wreck  an  enterprise  in  which  all  other  departments  and 
branches  are  efficiently  organized  and  ably  managed.  A 
properly  conducted  bureau  of  estimates  will,  on  the  con- 
trary, prevent  the  wreck  of  a  company,  and  provided  thei 
other  departments  are  wisely  operated,  will  insure  its  suc- 
cess. 

It  is  evident  from  the  nature  of  the  work  that  the  bureau 


MODERN  BUSINESS  ORGANIZATION        155 

of  estimates  demands  from  its  official  staff  traininj]^  in  two 
separate  fields  of  knowledGfe:  First,  in  enc^ineennpf,  and 
second,  in  accountancy.  Tlie  first  of  these  two  require- 
ments is  generally  recognized.  It  is  admitted  that  a  man 
must  have  an  engineer's  knowledge  of  materials  and  con- 
struction to  estimate  even  ajoproximately  the  cost  of  build- 
ing a  gas  engine  or  a  locomotive.  It  is  not  so  generally  rec- 
ognized that  the  second  qualification  is  equally  impera- 
tive, and  yet  unless  one  admits  the  truth  of  the  second 
proposition,  he  must  logically  affii*m  that  the  proper  train- 
ing for  the  chief  accountant  of  such  an  enterprise  as  the 
United  States  Steel  Corporation  is  that  of  the  engineer. 
The  cost  of  constructing  an  engine  is  not  merely  the  mate- 
rials and  the  time  directly  employed,  but  a  proportion  of  all 
the  imdivided  and  unassigned  expenses,  and  therefore  the 
accountant's  training  is  necessary  in  the  bureau  of  esti- 
mates. 

It  is,  of  course,  obvious  that  the  data  gathered  by  the 
engineers  may  be  referred  to  the  accounting  department 
for  arrangement.  Such  a  process  would  enable  the  bureau 
of  estimates  to  make  accurate  calculations.  This  method 
would  in  many  cases  occasion  delay  and  serve  to  sub-divide 
the  responsibility  among  the  separate  departments.  On 
the  whole,  therefore,  it  would  seem  to  be  better  business 
policy  to  imite  in  the  bureau  of  estimates  the  two  qualifica- 
tions by  separating  it  into  two  branches  and  placing  at  tlie 
head  of  the  one  an  expert  engineer  and  at  the  head  of  the 
other  an  expert  accountant.  The  head  of  the  bureau  of 
estimates  should,  of  course,  be  an  expert  in  one  and  have 
a  work  in  2"  knowledge  of  the  other  field. 

(3)  Selling  the  Goods.  The  goods  produced  in  the  fac- 
tory are  sold  either  to  the  middleman  or  to  the  retailer  or 
directly  to  the  consumer.  In  the  first  case,  the  middleman 
may  be  a  broker,  a  commission  man,  or  a  wholesaler.  In 
the  second  case,  he  may  be  a  general  stores  man,  or  a  spe- 


156  MAURICE  H.  ROBINSON 

cialist.    In  the  third  case,  he  may  be  one  of  a  select  class  or 
one  of  the  general  public. 

(1)  The  Brokerage  Sj^stem.  The  broker  is  an  interme- 
diary between  the  large  manufacturer  and  the  wholesaler  or 
the  large  retailer.  He  receives  a  small  commission  for  his; 
services,  the  contract  being  between  the  manufacturer  and 
the  middleman.  The  broker  is  an  important  factor  in  the 
sale  of  securities  and  of  certain  lines  of  goods  capable  of 
fine  gradations.  The  print  cloths  of  Fall  River  are  sold  in 
this  way  and  certain  kinds  of  grain  on  the  various  Boards 
of  Trade.  The  brokerage  Sfrgtem  of  selling  simplifies  the 
sales  organization  by  bringing  the  buyers  and  the  sellers  in 
direct  communication  in  a  central  exchange. 

(2)  The  Commission  Plan.  The  commission  house  is, 
like  the  broker,  an  intermediary,  but  differs  in  one  im- 
portant respect,  namely,  it  sells  directly  to  the  wholesaler 
and  sometimes  to  the  retailer,  advancing  a  part  of  the  price, 
guaranteeing  the  payments,  making  the  collections,  and  re- 
ceiving a  somewhat  larger  commission  than  the  broker. 
The  manufacturer  who  sells  through  the  commission  house, 
as  in  the  previous  case,  needs  only  a  simple  selling  organ- 
ization. 

(3)  The  Selling  Company.  A  modification  of  the  com- 
mission plan  of  selling  which  seems  to  be  of  growing  im- 
portance has  developed  in  recent  years.  It  consists  in  the 
formation  of  a  separate  corporation  entirely  distinct  in  its 
operations,  and  yet  under  the  control  of  the  manufacturing 
company  or  companies  which  organize  it.  The  control  is 
effected  usually  through  what  is  known  as  the  community  of 
interests  plan,  although  in  some  cases  the  stock  is  owned 
directly  by  the  manufacturing  corporation. 

The  community  of  interests  plan,  that  is,  control  through 
ownership  of  the  majority  of  the  stock  of  two- or  more  com- 
panies by  the  same  group  of  men,  has  been  employed  for 
years  with  satisfactory  results  by  the  Fairbanks  scale  man- 
ufacturers.   The  manufacturing  company  was  instrumen- 


MODERN  BUSINESS  ORGANIZATION        157 

tal  in  foniiinc:  two  solliii,i;-  oompanios,  nnmoly,  tlio  FaiT-bnTiks 
Company,  with  headquarters  in  New  York,  and  the  Cana- 
dian Fairbanks  Company  of  ^lontreal,  Canada.  The  innn- 
cv  controls  the  territory  east  of  Cleveland  and  north  of  the 
Ohio  River,  the  State  of  Texas,  and  all  foreign  territory  ex- 
cept Canada.  Tlie  latter  has  the  exclusive  nc^ht  of  soiling 
in  Canada.  In  addition  to  these  companies,  tlie  Fairl)anks 
]\fanufacturing  Company  sells  through  Fair])anks  Morse 
and  Company,  an  allied  corporation,  in  all  territory  in  the 
United  States  not  controlled  by  the  Fairbanks  Company  of 
New  York.  All  goods  manufactured  arc  turned  over  to 
the  three  selling  comioanios  to  be  sold  on  a  percentage  basis. 
In  this  way  the  manufacturing  company  is  relieved  of  the 
necessity  of  organizing  and  operating  a  selling  branch.  The 
same  method  was  adopted  by  the  smelting  trust  and  some  of 
the  other  mining  companies  about  ten  yaws  ago,  through 
the  organization  of  the  United  Metals  Selling  Company. 
During  the  past  decade  some  of  the  insurance  companies 
have  employed  the  same  means  of  selling  insurance,  the 
purpose  being  partly  to  escape  certain  regulations  consid- 
ered ])urdensome  and  i)artly  to  enable  the  organizers  to  par- 
ticipate in  the  jorofits  expected  from  the  selling  contracts. 
Selling  through  a  commission  house  has  certain  advan- 
tages which  are  likely  to  render  it  a  pemianent  feature  of 
business  organization.  In  the  first  place,  the  connnission 
house  is  in  a  position  to  sell  many  lines  of  goods  through 
one  organization  and  thus  save  unnecessary  expense.  Sec- 
ond, the  commission  man  becomes  an  expert  in  his  particu- 
lar field.  Third,  owing  to  trans])ortation  and  trade  condi- 
tions, the  commission  men  naturally  congregate  togctlier 
and  thus  concentrate  the  selling  of  certain  lines  of  goods  in 
a  certain  territory,  consequently  economizing  the  time  of 
the  buyers.  Fourth,  as  a  result  of  this  kind  of  concentra- 
tion an  excliange  naturally  develo})s,  as  tlic  fruit  and  i)ro- 
duce  exchanges,  the  metal  exchanges,  and  the  like.    An 


158  MAURICE  H.  ROBINSON 

exchange  is,  of  course,  a  great  saving  to  both  buyer  and 
seller. 

The  second  method  of  selling  on  commission,  namely, 
through  a  separately  organized  company  under  the  control 
of  the  manufacturing  company,  is  open  to  serious  criticism, 
especially  where  only  a  part  of  the  stock  is  owned  directly 
by  the  parent  company,  and  this  for  two  reasons.    First,  the 
selling  company  cannot  properly  undertake  to  sell  com- 
peting goods  and  it  would  not  ordinarily  be  desirable  to 
handle  different  lines  of  goods.     This  results  in  the  de- 
velopment of  a  selling  organization  for  every  separate 
manufacturer's  goods,  thus  unnecessarily  increasing  the 
cost  of  selling.     Second,  unless  the  interests  of  the  sell- 
ing company  and  of  the  manufacturing  company  are  iden- 
tical, through  a  common  ownership  or  the  ownership  of 
the  one  by  the  other,  the  selling  contract  is  likely  to  un- 
duly favor  the  selling  company.     This  results  from  the 
following   conditions.     The   selling   company   having  no 
large  permanent  investment  can  go  out  of  business  at  any 
time  on  short  notice;  the  manufacturing  company  cannot 
thus  withdraw  from  business  without  great  loss.     The 
selling  company  is  in  direct  contact  with  the  trade;  the 
manufacturing  company  is  not.     Consequently,  the  rate 
of  commission  is  likely  to  favor  the  selling  organization, 
thus  increasing  its  profits  at  the  expense  of  the  manu- 
facturing company.    This  method  of  selling  is  particular- 
ly liable  to  abuse  where,  as  is  often  the  case,  the  officers 
and  some  of  the  directors  are  the  principal  owners  of  the 
selling  company.    Under  these  conditions  the  latter  com- 
pany is  almost  sure  to  obtain  especially  favorable  terms  of 
commission,  and  indeed  in  some  cases  the  selling  organiza- 
tion has  deterioratd  into  a  scheme  for  bleeding  the  manu- 
facturing corporation. 

(4)  Selling  Through  the  Wholesaler.  In  the  majority  of 
cases,  the  manufacturer  sells  to  the  jobber  or  wholesaler, 
the  wholesaler  to  the  retailer,  and  the  retailer  to  the  con- 


MODERN  BUSINESS  ORGANIZATION        159 

siimor.  The  selling  process  is  therefore  broken  up  into 
stashes,  each  stage  having  its  own  separate  organization. 
Ilent'C  the  manufacturer  organizes  his  selling  (h'})artinent 
with  special  reference  to  catering  to  the  wholesale  trade 
and  whenever  inquiries  come  from  the  retailers  or  consum- 
ers, they  are  referred  to  the  wholesaler  who  controls  the 
territory  in  which  the  prospective  customer  lives. 

The  first  step  in  the  process  of  organization  consists  in 
dividing  the  countiy  into  distinct  territorial  groups  and 
appointing  a  district  manager  for  each.  The  selling  branch 
of  the  manufacturing  company  then  deals  directly  with  tlie 
district  managers,  and  the  district  managers  in  their  turn 
with  the  salesmen  in  their  own  territories.  The  district  man- 
ager either  directly  or  through  his  assistants  makes  ar- 
rangements for  the  sale  of  his  goods  to  the  wholesalers  in 
his  district. 

Goods  are  sold  to  the  wholesaler  either  on  general  ordci*s 
or  on  special  contracts.  In  the  first  case,  the  terms  of  sale 
are  fairly  uniform  in  the  trade,  and  the  work  of  the  district 
manager  consists  in  making  his  goods  known  and  in  pro- 
viding for  their  speedy  delivery  whenever  the  orders  are 
sold.  Consequently  the  personal  and  intellectual  quali- 
ties of  the  district  manager  and  his  chief  assistants  count 
for  much.  This  is  the  reason  for  the  especial  attention  giv- 
en such  qualities  as  personal  address  and  the  details  of  mer- 
chandising in  the  various  books  and  articles  on  this  partic- 
ular subject.  In  the  second  case,  the  company  makes  ex- 
clusive contracts  for  the  sale  of  the  goods  in  a  given  ter- 
ritory. The  work  of  the  manager  is  here  chiefly  directed 
to  making  these  contracts  and  to  seeing  that  they  are  re- 
newed whenever  the  term  expires,  or  in  dissatisfaction,  are 
transferred  to  a  rival  merchant.  This  system  prevents  the 
wholesaler  from  competing  in  the  price  of  the  same  goods, 
but  has  the  disadvantage  of  etTecting  the  sale  through  only 
a  portion  of  the  trade.  This  disadvantage,  however,  is 
not  a  verv  serious  one  in  the  wholesale  trade,  but  is  of 


160  MAURICE  H.  ROBINSON 

course  impracticable  for  many  lines  in  the  retail  business. 
The  exclusive  contract  system  enables  the  manufacturer 
to  control  the  retail  price  of  his  goods,  and  in  cases  where 
the  articles  possess  peculiar  merit,  this  feature  is  a  valu- 
able one.  When,  however,  the  goods  sold  are  of  standard 
quality  and  design,  the  price  is  regulated  by  competitive 
conditions  and  the  exclusive  contract  has  very  little  to 
recommend  it. 

A  modification  of  the  exclusive  contract  is  found  in  the 
provision  sometimes  made  that  the  merchant  may  sell  no 
competing  goods.  This  method  is  employed  by  manufac- 
turers having  a  partial  monopoly  and  where  the  control  of 
the  trade  is  not  sufficiently  extensive  to  enable  them  to 
control  the  price  in  any  other  way.  Sometimes  these  con- 
tracts are  impracticable,  and  the  same  results  are  secured 
by  the  adoption  of  the  so-called  factor  system.  This  plan 
was  adopted  on  a  large  scale  for  the  sale  of  refined  sugar  in 
1893,  and  has  been  used  in  many  other  lines  since  then.  It 
consists  in  offering  a  special  rebate  to  those  wholesalers  who 
purchase  their  goods  solely  from  one  manufacturer,  and  who 
in  addition  maintain  the  price  fixed  by  the  manufacturers. 

(5)  Selling  Through  the  Retailer.  John  Wanamaker  is 
authority  for  the  statement  that  until  the  Centennial  Exhi- 
bition in  Philadelphia  in  1876,  practically  all  manufactured 
goods  were  sold  through  the  wholesaler  and  the  retailer,  but 
that  since  then  the  middleman  has  been  gradually  eliminat- 
ed in  certain  lines  and  is  becoming  of  less  importance  in  al- 
most all  fields  of  merchandising.  The  manufacturer,  in 
other  words,  has  been  getting  nearer  the  ultimate  consumer, 
and  the  first  step  in  the  process  is  to  eliminate  the  whole- 
saler and  sell  directly  to  the  retailer. 

This  change  in  the  method  of  selling  has  caused  impor- 
tant modifications  in  the  selling  organization.  In  the  first 
place,  the  manufacturers  are  obliged  to  maintain  an  ex- 
tensive force  of  traveling  salesmen  in  order  to  cover  the 
territory  properly  and  protect  themselves  from  rival  man- 


MODERN  BUSINESS  ORGANIZATION        161 

iifaetiircrs.  This  necessitates  a  much  more  elaborate  sell- 
ing- ors^anization  and  vastly  complicates  the  pro])lem  of 
the  selling  management.  In  the  second  place,  this  system 
favors  the  adoption  of  the  exclusive  territory  plan,  exclu- 
sive contracts,  and  exclusive  agencies,  in  order  to  lessen 
the  expense  of  protecting  the  trade  amon^  the  retailers. 
In  the  third  place,  this  system  demands  extensive  advertis- 
ing on  the  part  of  the  manufacturers  in  order  to  create  a 
demand  for  their  goods  and  thus  facilitate  the  work  of  the 
district  manager  and  his  traveling  salesmen. 

In  most  cases  the  manufacturers  who  adopt  the  policy  of 
selling  to  the  retail  trade  are  not  in  a  position  to  cover  the 
whole  available  territory.  Consequently,  they  either  work 
certain  territories  and  permit  their  rivals  to  enjoy  the  rest 
undisturbed,  or  cover  the  whole  territory  in  a  slipshod  way. 
The  first  method  is,  of  course,  preferable,  although  it  is  al- 
ways more  difficult  to  work  a  territory  intensively  than  ex- 
tensively. For  this  purpose  certain  manufacturers  have 
established  wholesale  branches  resembling  the  ordinary 
wholesale  store,  with  the  exception  that  tlie  work  of  the 
branch  is  devoted  exclusively  to  the  sale  of  the  manufactur- 
er's goods.  Each  branch  then  takes  charge  of  the  selling 
organization  within  its  particular  territory.  A  few  of  the 
manufacturing  companies,  like  the  Standard  Oil  Company 
for  example,  are  large  enough  to  work  the  entire  tenitor}^ 
of  the  whole  civilized  world  in  a  fairly  intensive  way.  For 
the  best  results,  however,  a  company  must  be  of  enormous 
producing  capacity  and  this  usually  means  that  it  is  practi- 
cally the  only  producer.  The  growth  of  m(nio])olisti('  man- 
ufactures is  thus  intimately  connected  with  the  method  by 
which  goods  are  sold  to  the  retail  trade. 

(6)  Direct  Selling.  The  manufacturer  may,  instead  of 
adopting  any  of  the  above  methods,  choose  the  plan  of  sell- 
ing directly  to  the  consumer.  This  may  be  done  either  by 
establishing  stores  in  a  part  or  all  of  the  available  territory, 
or  by  employing  house  to  house  salesmen,  or  by  extensive 

B— II— U 


162  MAURICE  H.  ROBINSON 

advertising  and  the  mail  service.  The  second  method  is 
emplo3^ed  by  small  manufacturers  in  limited  territorial 
areas  and  by  some  of  the  greatest  corporations,  as,  for  ex- 
ample, the  Standard  Oil  Company,  with  its  house  to  house 
delivery  system.  This  is,  however,  an  exceptional  method. 
The  third  method  is  an  expensive  one  and  is  usually  com- 
bined with  one  or  both  of  the  other  two.  It  has,  however, 
been  used  by  the  mail-order  houses  with  great  success  in  a 
few  cases.  The  mail-order  house  is  not,  however,  primarily 
a  manufacturer.  It  is  a  middleman,  purchasing  goods  of 
the  manufacturer  or  wholesaler  and  distributing  directly 
to  the  individual  consumer.  The  mail-order  system  is  also 
employed  by  the  wholsaler  with  considerable  success. 

The  first  method  of  direct  selling,  namely,  through  the 
establishment  of  retail  stores  by  the  manufacturer,  is  per- 
haps the  most  radical  change  in  the  selling  organization 
that  has  been  inaugurated  in  recent  years.  Perhaps  the 
best  example  of  this  feature  of  selling  is  found  in  the  shoe 
trade,  where  several  of  the  manufacturers  maintain  fully 
equipped  retail  stores  for  the  exclusive  sale  of  their  own 
shoes  in  many  of  the  large  cities.  The  same  plan  has  been 
extensively  adopted  by  the  American  Tobacco  Company 
through  the  organization  of  the  United  Cigar  Stores  Com- 
pany and  the  establishment  of  many  retail  stores  in  the  com- 
mercial centers.  Some  of  the  brewers  are  in  fact  virtually 
the  owners  of  retail  saloons  and  thus  engage  in  retail  sell- 
ing, although  this  fact  does  not  ordinarily  appear  on  the  sur- 
face. And  some  business  establishments  that  are  primarily 
engaged  in  retailing  have  established  manufacturing 
branches  and  in  this  way  become  the  retailers  of  their  own 
products. 

Where  the  manufacturer  establishes  and  maintains  re- 
tail stores  the  organization  of  the  selling  division  is  fairly 
simple.  Each  store  is  under  the  direction  of  a  manager  who 
has  charge  of  its  operations,  directly  responsible  to  the  gen- 
eral selling  department.    Goods  are  consigned  to  the  va- 


MODERN  BUSINESS  ORGANIZATION        163 

rioiis  stores,  charged,  and  as  fast  as  sold  the  cash  is  de- 
posited to  tlie  account  of  the  company.  The  company  then 
is  a])le  to  detennine  the  eaniing  capacity  of  each  store.  It 
will  be  observed,  of  course,  that  this  system  simplifies  the 
central  selling  office  of  the  manufacturer,  since  the  market 
for  the  goods  is  found  through  the  local  stores. 

The  selling  division  has  two  special  functions:  First, 
to  select  the  proper  method  of  selling  the  goods;  and  sec- 
ond, to  organize  the  forces  of  district  managers  and  super- 
vise their  operations.  Tlie  selection  of  the  proper  method 
is  determined  chiefly  by  the  character  of  the  goods,  and 
secondly  by  the  customs  of  the  trade.  Standard  goods  are 
chiefly  sold  to  the  trade  in  the  regular  way;  specialties, 
on  the  other  hand,  often  give  better  results  on  exclusive 
contracts  of  either  the  first  or  the  second  class.  Unless, 
however,  the  wholesalers  and  the  retailers  are  accustomed 
to  the  exclusive  contract  system,  its  adoption  will  always 
be  of  slow  growth. 

The  selling  division  of  the  sales  department  is  ordinarily 
under  the  direction  of  a  general  manager  or,  as  in  the  case 
of  the  National  Cash  Register  Company,  a  sales  commit- 
tee. In  conformity  with  the  plan  of  organization  herein 
suggested,  the  general  manager  would  be  co-oi-dinate  in 
rank  with  the  advertising  manager,  the  head  of  the  bureau 
of  estimates,  and  the  chief  order  clerk.  His  work,  however, 
demands  a  higher  order  of  business  ability  and  a  more  ex- 
tensive experience.  Consequently,  the  selection  of  the  gen- 
eral manager  of  the  selling  division  is  one  of  the  most  im- 
poi-tant  functions  of  the  general  executive.  Tlie  general 
manager  in  turn  selects  the  heads  of  divisions  and  the  dis- 
trict managers,  and  approves  the  selection  of  their  ranking 
subordinates. 

In  the  management  of  the  selling  division,  the  general 
manager  takes  into  considorntion.  fii-st,  the  actual  and  pros- 
pective sales,  and  second,  the  expense  of  making  the  same. 
To  promote  the  first  he  needs  to  be  in  constant  and  intimate 


164  MAURICE  H.  ROBINSON 

toucli  witli  the  advertising  policy.  This  contact  is  se- 
cured through  the  general  sales  agent's  office,  immediately 
superior  to  both  the  advertising  manager  and  the  general 
manager  of  the  selling  division.  Again,  he  ought  to  know 
the  character  of  each  district,  the  industrial  and  financial 
conditions,  the  crops,  and  the  habits  of  life  in  that  territory. 
In  this  way  he  may  estimate  the  consuming  capacity  of  the 
population  with  respect  to  his  goods  and  thus  assign  each 
district  manager  his  proper  quota.  As  soon  as  it  becomes 
evident  that  any  one  of  the  managers  will  be  unable  to  dis- 
pose of  his  quota  within  the  proper  time  limit,  the  general 
manager  should  inquire  into  the  causes,  and,  having  found 
them,  endeavor  to  apply  the  proper  remedy.  If  the  district 
manager  is  inefficient  he  should  be  replaced;  if  dishonest, 
he  should  be  discharged  and  prosecuted;  if  ignorant  but 
otherwise  qualified,  he  should  be  instructed. 

To  detennine  the  actual  conditions  within  each  district 
manager's  office,  it  is  necessary  to  establish  a  more  or  less 
elaborate  system  of  reports  showing  sales,  prospects,  col- 
lections, credits,  and  business  conditions  in  each  district. 
The  district  manager,  however,  should  possess  independent 
sources  of  information  for  the  purpose  of  checking  the  ac- 
curacy of  the  salesmen's  reports.    Such  inforaiation  is  or- 
dinarily gathered  through  the  follomng  sources:     First, 
the  retailers.     The  dealers  are  in  a  position  to  know  the  bus- 
iness and  trade  conditions  in  their  vicinity,  and  the  letters 
from  a  considerable  number  will  usually  give  a  fairly  ac- 
curate picture  of  such  conditions.    Second,  the  reports  of 
bank  clearings  for  each  section  of  the  country  may  be  used, 
and,  to  supplement  these  reports,  the  commercial  move- 
ments  as   recorded  by   the   United   States   Government 
through  the  Department  of  Commerce  and  Labor,  by  the 
commercial  papers,  and  by  such  institutions  as  Dun's  and 
Bradstreet's.  Third,  the  reports  of  the  Weather  Bureau 
are  valuable,  showing  as  they  do,  the  rain-fall,  crop  pros- 


MODERN  BUSINESS  ORGANIZ^ATION         165 

pects,  etc.     Finally,  reports  from  salesmen  in  otlier  dis- 
tricts where  the  conditions  are  similar. 

Tliese  various  reports  are  supplemented  in  some  husi- 
ness  enterprises  by  what  is  known  as  the  "map  and  tack" 
system,  a  device  employed  to  show^  the  number  and  kind  of 
sales  in  every  part  of  the  country.  This  system  consists 
simply  of  a  map  of  the  country,  conveniently  mounted,  and 
a  number  of  tacks  of  different  designs,  each  special  design 
representing  certain  facts  in  regard  to  the  work  of  the  sell- 
ing department  in  the  given  territory.  Thus  a  black  tack 
may  represent  an  inquiry;  a  white  tack,  a  salesman;  a  green 
tack,  a  sale;  a  white  tack  with  black  dots,  the  number  of 
times  a  town  has  been  visited  within  the  year.  In  this  way 
all  the  pertinent  facts  with  regard  to  the  sales  in  a  given 
territory  may  be  recorded  and  by  proper  changes  kept  up  to 
date.  By  comparing  with  maps  in  different  parts  of  the 
country,  the  relative  efficiency  of  the  different  district  man- 
agers and  their  salesmen  may  be  ascertained  and  means 
taken  to  improve  the  efficiency  of  the  selling  organization 
in  those  districts  Avhere  it  is  weakest. 

(4)  The  Order  Division.  The  order  division  of  the  sales 
department  is  cliiel^y  clerical  in  its  nature  and  demands 
accuracy  and  system.  In  small  companies  the  original 
orders  are  forwarded  and  filed  directly  by  the  manufac- 
turing department.  In  the  larger  enterprises  it  has  been 
found  necessary,  in  order  to  prevent  mistakes,  to  copy  the 
orders  upon  standard  forms,  to  file  duplicates,  and  to  send 
the  order  on  to  the  ])roper  department  to  be  filled.  Tlie 
order  department  is  usually  under  the  control  of  a  chief 
clerk,  res])onsil)le  to  the  general  sales  agent.  lie  needs  a 
sufficient  num])er  of  clerks  and  copyists  to  kee]i  his  files 
clear  and  his  office  must,  of  course,  be  supplied  with  the  nec- 
essary filing  apparatus. 


166  MAURICE  H.  ROBINSON 

The  Traffic  Department. 

This  department  appears  under  different  names  in  dif- 
ferent business  enterprises  and  sometimes  it  exists  without 
any  name  at  all.  Where  it  has  a  name,  it  may  be  called  the 
shipping  department,  or  the  transportation  department, 
etc.,  etc.  Where  it  has  no  name,  its  work  is  ordinarily  car- 
ried on  as  a  branch  of  the  manufacturing  department  or  in 
some  cases,  of  the  sales  department.  In  any  case,  its  func- 
tion is  distinct  and  its  work  necessary. 

The  object  of  the  traffic  department  is  to  see  that  the 
goods  turned  out  by  the  manufacturing  department  and  sold 
b}^  the  sales  department  are  shipped  in  the  most  acceptable 
manner  and  by  the  most  convenient  and  inexpensive  route 
to  their  destination.    A  fully  equipped  traffic  department, 
therefore,  includes  two  branches:     First,  a  shipping  divis- 
ion; and  second,  a  rate  division.     The  first  has  charge  of 
storing,  packing,  and  shipping;  the  latter,  of  rates,  routes, 
claims,  and  other  related  matters.    The  first  of  these  is 
often  under  the  control  and  supervision  of  the  manufactur- 
ing division.    Its  proper  place,  however,  is  as  a  branch  of 
the  traffic  department,  which,  being  in  charge  of  rates  and 
the  manner  of  shipment,  is  in  a  better  position  to  supervise 
the  packing,  since  the  kind  of  boxing  and  packages  used  is 
determined  chiefly  by  the  method  of  shipment  and  the  route 
over  which  the  goods  are  to  go.    This  plan  of  organization, 
therefore,  conduces  to  economy  of  expense  and  convenience 
of  service.    It  has  often  been  remarked  that  our  American 
manufacturers  fail  in  the  foreign  market  owing  to  their 
inconvenient  method  of  packing  their  goods.     A  traffic 
department  would  be  more  likely  to  understand  conditions 
and  the  foreign  likes  and  dislikes,  and  thus  to  cater  to  the 
foreign  trade. 

The  rate  division  is,  of  course,  a  branch  of  the  traffic  de- 
partment. It  is  under  the  direction  of  a  chief  rate  clerk, 
directly  responsible  to  the  traffic  manager.    The  chief  rate 


MODERN  BUSINESS  ORGANIZATION 


167 


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168  MAURICE  H.  ROBINSON 

clerk  is  often  selected  from  the  staff  of  some  railway,  owing 
to  the  fact  that  this  division  has  in  the  past  been  neglected 
by  our  manufacturers.  As  the  importance  of  this  work 
becomes  better  known,  more  attention  will  be  given  to  this 
branch,  and  the  officers  will  come  up  through  the  ranks  by 
promotion  rather  than  be  chosen  from  the  railway  service. 
The  rating  division  must,  of  course,  be  thoroughly  posted 
upon  railway  rates,  railway  routes,  time  cards,  connections, 
through  express  service,  junction  points,  and  the  like.  It 
makes  contracts  for  regular  shipments  and  for  special  de- 
liveries. It  sees  that  the  goods  are  delivered  and  if  not, 
makes  and  prosecutes  the  claims  for  the  same.  In  some 
cases  this  branch  of  the  manufacturing  department  actually 
operates  cars,  boats,  and  other  means  of  transportation. 
Then  the  department  becomes  of  very  great  importance  and 
often  takes  a  regular  place  in  the  railway  world  by  entering 
into  competition  with  other  railways  for  the  traffic  of  other 
manufacturers.  To  make  the  above  analysis  of  the  operat- 
ing organization  plain,  the  diagram  on  the  previous  page 
is  shown. 

VI.  INTER-RELATIONS  OF  BUSINESS 
ENTERPRISES. 

Business  enterprises,  whether  controlled  by  the  individ- 
ual proprietor,  the  partnership,  the  corporation,  or  the  co- 
operative society,  are  entirely  independent  of  each  other  in 
their  working  operations  except  so  far  as  they  voluntarily 
form  alliances  of  more  or  less  permanence  and  of  greater 
or  less  vitality.  Indeed,  until  the  middle  of  the  last  cen- 
tury their  individual  independence  was  so  marked  and  dom- 
inant that  the  theory  of  political  economy  as  well  as  of  law 
was  largely  based  upon  this  idea.  With  the  introduction 
of  machinery,  the  bringing  of  large  groups  of  capitalists  and 
workingmen  together  into  closer  proximity,  with  the  devel- 
opment of  the  railroad,  the  telegraph,  and  the  bringing  of 
industrial  enterprises  into  direct  competition,  the  struggle 
for  existence  was  extended  to  the  business  field. 


MODERN  BUSINESS  ORGANIZATION         169 

As  a  result  of  tlie  now  conditions  various  forms  of  unions 
have  been  originated  and  adopted,  all  having  a  common  pur- 
pose, namely,  to  subserve  the  interests  of  the  parties  to  the 
organizations.  The  form  of  union  adopted  varies  with  the 
character  of  the  parties  to  it,  with  the  purposes  to  be  at- 
tained, and  with  the  local  conditions  in  the  various  coim- 
tries  in  which  they  are  operated.  But  all  of  these  organiza- 
tions, whatever  their  foiTn,  have  one  feature  in  common, 
namely,  they  unite  business  enterprises  into  a  higher  type 
of  organic  union.  Just  as  individuals  unite  into  partner- 
ships, corporations,  or  co-operative  societies,  so  business 
enterpnses  join  together  to  form  business  alliances  of  va- 
rious kinds  and  for  various  purposes. 

Tlie  more  important  of  these  alliances  are  the  associa- 
tion, the  combination,  the  trust,  the  holding  corporation, 
and  the  leasing  company.  In  addition  to  these,  informal 
alliances  are  sometimes  devised,  such  as  the  community  of 
interests;  and  finally  a  complete  merger  may  take  place,  in 
which  case  the  alliance  is  made  direct  and  permanent  and 
the  formerly  independent  or  partially  independent  business 
enterprises  lose  their  identity,  being  pennanently  amalga- 
mated into  a  new  union  of  greater  size  and  greater  com- 
plexity. 

The  Association. 

The  association  is  a  voluntary  alliance  of  business  enter- 
prises for  the  purpose  of  furthering  their  common  inter- 
ests. Its  members  may  ordinarily  withdraw  at  any  time, 
and  usually  each  one  is  required  to  pay  a  small  annual  fee 
in  order  to  continue  in  the  organization.  The  association 
works  through  a  central  board  of  directors  or  a  central  com- 
mittee, elected  from  the  membei^ship.  Its  efficiency  de- 
pends upon  two  things:  First,  the  activity  of  the  central 
committee;  and  second,  the  co-operation  of  the  individual 
members.  If  the  central  committee  is  inefficient,  or  if  the 
members  fail  tu  co-operate,  the  association  is  a  failure.    If, 


170  MAURICE  H.  ROBINSON 

however,  the  committee  is  active  and  vigilant,  and  is  sup- 
ported b}^  substantial  contributions  resulting  in  a  full  treas- 
ury, it  is  possible  to  accomplish  much  even  though  the  indi- 
vidual members  of  the  organization  devote  themselves  en- 
tirely to  their  own  private  interests. 

The  association  has  two  principal  types,  the  first  being 
composed  of  various  kinds  of  business  enterprises  within  a 
given  territory,  and  the  second,  of  business  enterprises  of 
the  same  character  with  little  or  no  regard  to  geographical 
location. 

The  first  type  is  illustrated  b}^  local  commercial  clubs 
and  chambers  of  commerce  of  various  cities,  and  the  second 
type,  by  the  trade  and  manufacturing  associations  of  va- 
rious states  and  of  the  United  States  where  membership  is 
confined  to  one  branch  of  business  activity.  The  first  type 
varies  greatly  in  size  and  efficiency,  but  all  have  the  com- 
mon characteristic  of  uniting  business  enterprises  of  many 
kinds  within  the  same  territory.  Some  of  these  associa- 
tions are  informal  in  character,  while  others  operate  under 
a  charter  provided  for  associations  working  for  general 
purposes  rather  than  for  direct  pecuniary  profit  to  the  mem- 
bers. To  illustrate  the  work  of  this  type  of  general  associa- 
tion, the  following  organizations  have  been  selected:  The 
Chamber  of  Commerce  of  Champai2:n,  Illinois,  and  the  Mer- 
chants' Association  of  "New  York  City. 

The  Champaign  Chamber  of  Commerce  was  founded  in 
1900  by  the  retail  merchants  of  the  city  for  the  purpose  of 
establishing  and  maintaining  a  co-operative  credit-rating 
society.  Gradually  other  interests  sought  admission  to 
its  membership  and  with  its  enlargement  came  an  extension 
of  its  activities  about  five  years  after  its  foundation.  It 
was  then  incorporated  under  the  Illinois  act  for  societies 
not  operating  for  pecuniary  profit,  and  subsequently  has 
still  further  enlarged  its  work  until  its  scope  of  operation  is 
now  co-extensive  with  the  political,  social,  and  business  ac- 
tivity of  the  city.    Within  the  past  three  years  it  has  been 


MODERN  BUSINESS  ORGANIZATION         171 

instnimental  in  securing  early  closing  during  the  summer 
months,  and  has  taken  a  prominent  part  in  securing  im- 
provements in  the  city  government,  especially  in  the  fire 
department,  the  parks,  the  water  system,  and  pavements. 
It  has  been  the  medium  of  securing  for  the  community  more 
favorable  conditions  in  express  and  railway  rates;  it  has 
assisted  in  locating  some  important  manufacturing  estab- 
lishments in  the  city,  and  is  carrying  on  a  movement  look- 
ing towards  the  improvement  of  the  roads  in  the  locality. 

Thus  the  Champaign  Chamber  of  Commerce,  beginning 
as  an  organization  of  retail  merchants  chiefly  for  selfish 
purposes,  has  by  the  process  of  natural  evolution  become  an 
association  representing  all  the  interests  of  the  city  and 
devoted  to  the  general  welfare  rather  than  the  special  in- 
terests of  a  class. 

The  ^Merchants'  Association  of  Xew  York  City  is  a  sec- 
ond example  of  a  general  business  association,  representing 
this  type  in  its  most  comprehensive  form.  This  association 
was  founded  in  1898  *'to  foster  trade  and  commerce  and  the 
interests  of  those  having  trade,  business  and  financial  inter- 
ests in  common  in  the  State  of  New  York  and  elsewhere,  to 
reform  abuses  relative  thereto,  or  affecting  the  same,  to  se- 
cure freedom  from  unjust  or  unlawful  exactions,  to  dif- 
fuse accurate  and  reliable  information  concerning  matters 
relating  thereto  or  otherwise,  to  procure  uniformity  and 
certainty  in  the  customs  and  uses  of  trade  and  commerce, 
to  settle  differences  and  to  procure  uniformity  of  opinion 
and  action  and  co-operation  between  its  members,  to  pro- 
cure a  more  enlarged,  united  and  fnendly  intercourse  and 
action  between  business  men,  and  to  do  such  other  and  fur- 
ther acts  and  things  relating  thereto  which  may  be  found 
necessary  or  convenient,  so  far  as  the  same  are  permitted  by 
the  laws  of  the  State  of  New  York  to  corporations  organized 
under  this  act."  * 

It  is  chartered  under  the  membership  corporation  law 

♦  Year  Book.  Merchants'  Association  of  New  York.  1910. 


172  MAURICE  H.  ROBINSON 

of  New  York  and  consequently  is  managed  by  a  board  of 
directors  and  the  nsual  executive  officers.  Upon  the  oper- 
ating side  it  ^^'orks  through  committees,  some  of  which  are 
permanent  and  some  temporary.  The  committees  are  as 
follows : 

Executive.  Gas  and  electricity. 

Commercial  law.  Express  transportation. 

City  conditions.  Foreign      and      colonial 

City  plan.  commerce. 

City  transportation  and  Harbor  and  shipping, 

terminals.  Insurance. 

Currency.  International       arbitra- 

Customs      service      and  tion. 
revenue  laws.  Judicial  administration. 

Domestic  commerce.  Library, 

Pollution  of  state  waters.  Postal  affairs. 

Protection  of  industrial  Taxation  and  finance, 

property.  Teraiinals       and       port 

Telephones.  charges. 

Water  supply. 

The  committee  list  shows  in  a  general  way  the  varied 
activities  of  this  association.  During  the  year  1909  the 
organization  was  especially  active  in  the  following  lines: 
Special  passenger  rates  for  merchants  visiting  New  York, 
western  freight  rate  cases,  Chattanooga  Rate  case,  port 
differentials,  express  rates  in  New  York  State,  uniform 
bill  of  lading,  removal  of  steam  railway  tracks  from  the 
streets  of  the  city,  improving  waterways  and  harbors, 
establishment  of  a  permanent  tariff  commission,  and  city 
administration. 

Wliile  the  Merchants'  Association  of  New  York  City  is 
founded  upon  the  territorial  idea,  it  recognizes  the  special 
interest  of  trade  groups  by  arranging  for  informal  meet- 
ings of  the  various  lines  of  commercial  and  industrial  ac- 
tivities in  the  city.    For  example,  during  the  year  1909, 


MODERN  BUSINESS  ORGANIZATION         173 

informal  meetings  of  the  jewelry  and  allied  trades,  wom- 
an's apparel  trades  and  the  white  goods  division  of  tlu^ 
dry  goods  trade,  were  held  for  the  pnrpose  of  discussing 
topics  of  special  interest  to  these  groups.  It  is  the  plan  to 
continue  these  group  meetings  until  all  the  important  trade 
groups  in  the  city  have  heen  reached.  The  inauguration 
of  this  policy  had  the  effect  of  increasing  the  membership, 
thus  securing  the  interest  of  many  business  enterprises  not 
attracted  by  the  general  association. 

The  second  type  of  organization  caters  to  the  special 
interests  of  a  particular  industrial  or  commercial  group. 
The  scope  of  its  work  is  therefore  more  limited  in  charac- 
ter, but  it  gains  in  efficiency  where  it  loses  in  breadth. 
These  associations  are  exceedingly  numerous  and  all  arc 
formed  upon  essentially  the  same  principle  and  operated  in 
the  same  general  way.  Among  the  organizations  the  Illi- 
nois Manufacturers'  Association  has  been  selected  for  pur- 
poses of  illustration.  This  organization  was  founded  in 
1898  and  operates  under  an  Illinois  charter  provided  for 
such  societies.  It  therefore  has  a  board  of  directors  and 
the  usual  list  of  executive  officers.  Its  membership  is 
made  up  of  manufacturers  of  all  classes  having  plants  lo- 
cated within  the  state,  and  in  addition  includes  a  few  man- 
ufacturers whose  plants  are  situated  outside  the  state  but 
whose  work  is  intimately  connected  with  industrial  condi- 
tions within  Illinois.  Like  other  associations  it  oper- 
ates chiefly  through  committees,  some  of  which  are  per- 
manent and  some  of  which  are  temporary.  During  the 
year  1910,  this  association  was  interested  especially  in 
two  particular  projects:  First,  a  conference  of  industrial 
and  commercial  organizations  for  the  purpose  of  securing 
the  repeal  of  the  coi-poration  tax  law;  and  second,  in  a  con- 
ference of  shippei-s  and  commercial  organizatioi^  for  the 
purpose  of  opposing  an  advance  in  freight  rates  both  east 
and  west.  At  each  of  these  conferences  representatives  of 
business  enterprises  from  all  parts  of  the  country^  were 


174  MAURICE  H.  ROBINSON 

present  and  a  general  discussion  of  the  propositions  was 
held  in  open  meeting.  As  a  result  of  the  first  conference, 
that  on  the  corporation  tax  law,  a  committee  was  sent  to 
Washington  to  present  the  views  of  the  association  to  the 
Federal  Congress.  A  series  of  resolutions  were  drawn  up, 
discussed,  and  finally  adopted,  and  a  committee  of  eleven 
was  appointed  for  the  purpose  of  presenting  the  resolu- 
tions. While  it  is  impossible  to  ascertain  just  what  in- 
fluence this  conference  had,  it  is  claimed  by  the  association 
that  it  resulted  in  suppressing  the  publicity  clause  of  the 
federal  corporation  tax  act. 

The  second  conference  was  attended  by  a  large  number 
of  representatives  of  business  enterprises  located  chiefly  in 
Illinois,  and  the  Central  West.  At  this  meeting  the  general 
subject  of  the  economic  effect  of  advanced  freight  rates, 
as  well  as  the  legal  aspects  of  the  question,  were  discussed, 
and  as  a  result  a  series  of  resolutions  were  adopted  to  the 
following  effect: 

1.  That  the  income  of  the  various  railroads  has  been  in- 
creasing during  the  past  ten  years; 

2.  That  during  the  first  seven  months  of  the  year  1910 
the  net  income  of  the  principal  trunk  line  railroads  had 
also  increased; 

3.  Tliat  in  their  opinion  a  reduction,  rather  than  an  ad- 
vance, was  demanded  by  present  conditions. 

Accordingly  all  the  railroads  in  the  Official  Classification 
territory  were  asked  to  suspend  the  proposed  advance  in 
commodity  rates  and  submit  the  question  to  the  Interstate 
Commerce  Commission  for  arbitration  to  determine  wheth- 
er any  general  advance  in  rates  was  reasonable  and  neces- 
sary. For  the  purpose  of  carrying  these  resolutions  into 
effect  a  committee  of  fifteen,  representing  the  general  con- 
ference, was  appointed  and  entrusted  with  the  duty  of 
presenting  the  views  of  the  conference  to  the  Interstate 
Commerce  Commission  and  the  railroads.  In  addition  to 
the  two  important  conferences  above  described,  the  Uli- 


MODERN  BUSINESS  ORGANIZATION         175 

nois  ^Nranufacturers'  Association,  throuj^h  its  pormaiioiit  or- 
ganization, is  constantly  engaged  in  activities  for  the  pur- 
pose of  protecting  tlie  interests  of  manufacturers  of  the 
state  from  the  various  industrial  interests  with  which 
they  come  into  conflict,  and  at  the  same  time  for  improving 
the  conditions  under  which  the  manufacturers  are  work- 
ing. 

In  common  with  the  commercial  associations,  the  Illi- 
nois Manufacturers'  Association,  it  will  be  noticed,  works 
chiefly  through  indirect  methods  of  influencing  other  or- 
ganizations and  especially  the  state  legislature  and  the 
national  Congress.  Whenever  any  measure  is  proposed, 
which,  in  the  opinion  of  the  association,  would  be  detri- 
mental to  the  interests  of  manufacturers,  the  views  of  the 
organization  are  presented  through  a  committee  of  the  as- 
sociation to  the  proper  committee  of  the  legislature. 
Whenever  legislation  is  proposed  in  which  they  are  inter- 
ested they  assist  in  securing  such  legislation.  To  show  the 
extent  of  the  work  which  has  been  imdertaken  by  the  asso- 
ciation, the  following  quotation  from  a  pamphlet  issued 
by  this  organization  is  added: 

**Our  Association  stopped  the  publicity  required  by 
the  Federal  corporation  tax  law. 

**We  took  the  initiative  in  securing  the  appointment  of 
a  state  commission  to  draft  an  employers'  liability  measure 
to  submit  to  the  next  Illinois  General  Assembly. 

"We  secured  for  manufacturers  of  this  state  reasonable 
factory  inspection,  hazardous  machinon-  legislation,  and 
defeated  a  very  unfair  measure  that  it  was  attempted  to 
put  through  the  legislature. 

"We  are  now  opposing  the  proposed  increase  of  from 
twelve  to  sixteen  per  cent  in  the  freight  rates  on  coal  in 
Illinois  and  Indiana,  because  an  advance  at  this  time  is 
unwarranted  by  conditions  and  cannot  be  added  to  cost 
of  marketing  our  product. 


176  MAURICE  H.  ROBINSON 

**We  have  a  committee  wliich  is  working  out  a  plan  to 
take  care  of  the  refuse  and  discarded  material. 

*'AVe  have  created  a  bureau  whose  influence  Avill  be  used 
to  minimize  thefts  in  your  plant. 

"We  have  a  committee  that  has  started  an  agitation  to 
secure  the  best  possible  public  highways  for  the  $7,000,000 
taxes  which  the  property  owners  of  this  state  pay  every 
year  for  that  purpose. 

*'We  are  agitating  the  rearrangement  of  railroad  ter- 
minals in  Chicago  so  that  freight  can  be  handled  more  ex- 
peditiously, which  means  economy." 

The  Combination. 

The  combination  like  the  association  is  made  up  of  busi- 
ness enterprises  which  are  otherwise  independent.  In  the 
case  of  the  combination,  however,  these  enterprises  are 
generally  engaged  in  the  same  line  of  industrial  activity. 
It  differs  from  the  association  in  that  it  imposes  certain 
duties  upon  each  of  the  members  to  it,  and  consequently 
in  order  to  be  a  successful  combination  it  must  embrace  a 
large  majority  of  all  business  enterprises  of  the  same  kind 
within  a  given  market.  A  combination  is  held  together  by 
an  agreement  or  contract  specifying  the  terms  under  which 
the  members  unite  into  the  union.  Each  enterprise  thus 
loses  a  part  of  its  independence,  but  retains  its  liberty  in 
all  points  not  covered  by  the  terms  of  the  agreement. 
When  a  member  of  the  combination  breaks  the  rules  of  the 
organization,  it  to  that  extent  nullifies  the  work  of  the  or- 
ganization. Such  an  organization  may  be  either  legal  or 
illegal.  Wherever  they  are  legal  the  articles  under  which 
the}^  operate  constitute  a  contract  and  may  be  enforced  as 
other  contracts.  Wlierever  such  organizations  are  illegal, 
their  permanence  and  efficiency  depend  entirely  upon  the 
willingness  of  each  of  the  members  to  live  up  to  the  terms 
of  the  combination. 

In  the  United  States  such  organizations  have  from  the 


MODERN  BUSINESS  ORGANIZATION         177 

beginning  held  to  be  cither  invalid  or  crimiiial.  lu  the 
first  ease  the  state  and  national  authorities  will  not  assist 
an  organization  in  its  efforts  to  secure  obedieuce  to  the 
general  agreement.  In  the  second  case,  the  state  admin- 
istrations will,  under  proper  conditions,  take  steps  to  pun- 
ish the  members  of  such  organization  for  becoming  mem- 
bers of  a  criminal  organization. 

Combinations  are  formed  for  the  purpose  of  directly 
increasing  the  business  prosperity  of  the  various  members. 
This  may  be  accomplished  either  by  lessening  competition 
and  thus  enabling  the  industry  in  which  the  combination  is 
formed  to  secure  better  prices;  or  by  improving  the  oper- 
ating conditions,  thus  lowering  the  cost  of  production. 
Since  a  combination  is  at  best  a  temporary  affair,  and  the 
members  retain  their  own  individual  rights  except  so  far 
as  the  agreement  or  contract  extends,  it  is  usually  impos- 
sible to  secure  economies  in  manufacturing  and  ordinarily 
impracticable  in  either  purchasing  the  materials  or  selling 
the  goods.  Consequently  a  combination  is  forced  to  direct 
its  energies  toward  lessening  competition  and  securing  in- 
creased prices.  On  this  account  combinations  are  classi- 
fied in  accordance  with  the  means  which  they  take  to  se- 
cure this  end,  and  are  therefore  divided  into  the  following 
groups : 

1.  Price  combinations. 

2.  Production  combinations. 

3.  Geographical  combinations. 

4.  Combinations  for  sharing  the  business. 

5.  Combinations  for  sharing  the  profits. 

1.  In  a  price  combination  the  agreement  pro^ndes  for 
a  cei'tain  minimum  price  below  which  no  mem])er  of  the 
combination  can  sell  a  specified  line  of  goods.  C(mse- 
quently  this  form  of  organization  is  adapted  to  those  lines 
of  industry  in  which  goods  are  of  a  staple  quality  and 
standard  designs.    In  any  other  line  it  has  the  effect  of  in- 

B— H— 12 


178  MAURICE  H.  ROBINSON 

creasing  competition  in  the  quality  of  the  goods  while  lim- 
iting it  in  regard  to  the  price.  Price  combinations,  there- 
fore, are  of  importance  in  only  a  comparatively  few  lines 
of  manufacturing. 

2.  A  limitation  of  output  has  the  same  effect  as  a  price 
combination  in  an  indirect  way — by  limiting  the  produc- 
tion the  price  can  be  maintained.  For  example,  if  the  out- 
put of  factories  producing  a  certain  line  of  goods  be  limited 
to  two-thirds  of  their  capacity,  the  supply  of  goods  on  the 
market  will  be  decreased  and  the  price  will  automatically 
rise  to  a  higher  level.  This  form  of  combination  is  there- 
fore useful  wherever  it  is  more  convenient  to  limit  the  out- 
put than  it  is  to  limit  the  price. 

3.  Wherever  it  is  difficult  to  limit  either  price  or  output, 
and  the  factories  are  located  in  distant  territories,  the  third 
form  of  combination  is  sometimes  used.  The  territory  is 
divided  into  districts  and  each  manufacturer  is  assigned 
a  particular  territory  within  which  he  may  supply  the 
trade  without  competition  from  any  other  producer.  Cus- 
tomers from  without  the  territory  of  any  particular  mem- 
ber of  the  combination  are  either  referred  to  the  manufac- 
turer within  the  district  to  which  the  consiuner  belongs,  or 
the  order  is  nominally  filled  by  the  manufacturer  receiv- 
ing it,  but  the  actual  production  of  the  goods  and  the  profit 
for  the  same  are  assigned  to  the  proper  member  of  the  com- 
bination. 

4.  In  certain  industries  neither  of  the  above  forms  of 
combination  is  practicable.  Hence  manufacturers  ar- 
range in  advance  to  share  whatever  orders  may  come  upon 
the  market  upon  the  percentage  basis.  For  example,  Co. 
A  will  receive  15  per  cent,  Co.  B  10  per  cent,  Co.  C  5  per 
cent  and  so  on  until  the  total  production  is  provided  for. 
Whenever  orders  are  received  they  are  either  divided  di- 
rectly and  assigned  to  the  companies  in  the  proper  propor- 
tions, or  the  orders  are  assigned  to  particular  manufactur- 
ers in  such  a  way  that  their  proper  quota  is  maintained. 


MODERN  BUSINESS  ORGANIZATION         179 

5.  In  the  profit-sliaring  combination  each  niomhcr  is 
entirely  independent  of  the  others  in  mannfaetnrin^  the 
goods  and  usually  in  their  sale.  The  total  profits  of  the 
business  of  an  entire  group  is,  through  a  central  account- 
ing office,  ascertained  and  distrilmtcd  among  the  various 
members  in  accordance  with  a  scale  agreed  upon  at  tlie 
establishment  of  the  organization.  Consequently,  the 
members  of  the  combination  are  interested  not  in  their  own 
individual  ]">rofits,  but  in  the  combined  profits  of  the  entire 
organization.  Hence  it  is  for  the  interest  of  each  party 
to  maintain  the  prices  and  limit  the  output  so  far  as  neces- 
sary in  order  to  make  the  profits  of  the  entire  organization 
the  greatest  possible.  The  member  who  cuts  prices  for  the 
sake  of  increasing  his  own  output,  increases  his  own  prof- 
its, but  he  does  this  at  the  expense  of  the  profits  of  the 
other  members.  He  therefore  finds  that  his  share  of  the 
profits,  as  determined  by  the  central  office,  is  increased 
by  maintaining  a  price  policy  that  is  favorable  to  the  busi- 
ness interests  of  the  industry  rather  than  that  of  his  own 
particular  plant. 

In  the  United  States  the  combinations  have  two  marked 
disadvantages:  First,  they  are  unable  to  effect  economies 
in  production;  and  second,  they  are  non-enforceable  at 
common  law,  and  since  about  1880  they  have  generally 
been  made  illegal  under  statute  law.  "Wiu'le  in  certain  in- 
stances they  have  been  remarkably  successful  for  a  limited 
period,  generally  they  have  been  short-lived  and  at  their 
termination  conditions  in  the  industry  have  been  so  dis- 
advantageous as  to  overcome  partially  if  not  wholly  all 
the  advantages  which  had  been  secured  during  the  short 
period  of  the  combination.  Consequently  the  business  in- 
terests have  sought  other  means  of  securing  the  end  and 
have  generally  adopted  in  recent  years  some  one  of  the 
following  foiiiis  of  organization. 


180  MAUEICE  H.  liOBINSON 

Truste. 

In  the  Unite'd  States  the  trust  was  the  direct  successor 
of  the  combination.  It  was  devised  by  the  Standard  Oil 
Company  in  1879  and  is  generally  accredited  to  Mr.  Dodd, 
the  general  solicitor  of  that  corporation.  In  theory  the 
trust  is  so  simple  that  the  wonder  is  that  it  was  not  devised 
earlier.  In  the  first  place,  all  business  enterprises  be- 
coming parties  to  a  trust  are  incorporated,  if  they  are  not 
already  corporations.  A  board  of  trustees  is  then  arranged, 
which  issues  trust  certificates  equal  in  amount  to  the 
sum  of  all  the  shares  in  the  various  corporations.  Trust 
certificates  are  then  exchanged  for  the  shares  of  stock,  or 
so  many  thereof  as  become  parties  to  the  trust.  It  is  neces- 
sary that  over  one-half  of  the  voting  shares  in  each  one  of 
the  corporations  be  exchanged  for  trust  certificates  in  or- 
der that  the  trust  may  work  successfully.  The  board  of 
trustees  then  controls  each  of  the  corporations,  elects  the 
directors,  and  through  them  determines  the  business  pol- 
icy of  each  one  of  the  subsidiary  corporations.  The  hold- 
ers of  the  trust  certificates  elect  the  trustees,  make  the  by- 
laws, and  receive  the  dividends  declared  upon  trust  certif- 
icates in  exactly  the  same  way  as  the  shareholders  in  the 
ordinary  corporation. 

The  trust  thus  possesses  all  the  advantages  of  the  combi- 
nation, and  in  addition  certain  others  of  great  importance 
which  the  combination  never  could  attain.  Like  the  com- 
bination, the  trust  could  regulate  and  maintain  prices,  limit 
the  output,  or  divide  the  territory  whenever  such  a  policy 
was  thought  advisable.  It  could  distribute  the  work 
among  the  several  corporations,  and  by  virtue  of  its  organ- 
ization the  profits  were  shared  in  proportion  to  the  trust 
certificates  held  by  the  former  shareholders  in  the  several 
corporations.  Furthermore,  whenever  practicable,  all  of 
the  shares  were  thus  exchanged  and  the  trust  became  prac- 
ticall}^  a  permanent  organization;  it  was  therefore  possible 


MODERN  BUSINESS  ORGANIZATION         181 

to  secure  all  the  economics  of  ccntralr/cd  inaTiaejcment 
and  concentrated  production.  The  tnist,  controlling  the 
election  of  the  directors  in  the  subsidiary  corporations, 
could  consolidate  the  administration  hy  appointing  a  gen- 
eral sales  agent,  a  general  manager  for  the  plants,  a  gen- 
eral auditor  and  a  general  treasurer.  Consequently  stand- 
ard methods  in  all  departments  could  be  introduced  and  a 
comparative  method  of  securing  efficiency  installed  and 
operated.  The  production  could  be  concentrated  in  the 
plants  most  economically  located  and  operated,  and  plants 
operating  with  less  efficiency  could  be  dismantled  or  sold. 
On  account  of  these  advantages,  the  success  of  the 
Standard  Oil  Trust  and  of  its  immediate  predecessors  was 
so  pronounced  that  a  considerable  number  of  trust  organ- 
izations were  formed  and  this  became  the  characteristic 
method  of  uniting  business  enterprises  during  the  decade 
from  1880  to  1890.  That  this  form  was  not  more  widely 
adopted  was  due  to  two  causes:  First,  the  difficulty  of  ad- 
justing the  interests  of  the  several  business  enterprises 
united;  and  second,  the  decision  of  the  supreme  courts 
in  New  York  and  Ohio  to  the  effect  that  the  trust  fonn  of 
organization  was  illegal.  It  was  therefore  abandoned  and 
the  consolidations  operating  under  this  particular  form 
of  organization  were  converted  into  a  new  type  of  organiza- 
tion which  will  now  be  described. 

The  Holding  Corporation. 

The  holding  corporation  is  in  many  respects  compar- 
able with  the  trust.  It  consists  in  the  incorporation  of  a 
company  under  the  laws  of  some  one  of  the  several  states, 
witli  a  charter  permitting  the  enterprise  so  organized  to 
hold  shares  of  stock  in  other  coi^porations  as  well  as  physi- 
cal property.  The  holding  corporation  dates  from  as  early 
as  1832  when  the  Baltimore  &  Ohio  Railroad  Company  was 
authorized  by  the  State  of  ^laryland  to  subscribe  to  shares 
of  stock  in  the  Washington  Branch  Road.     This  method 


182  MAURICE  H.  ROBINSON 

was  used  on  a  large  scale  by  the  Pennsylvania  Railroad 
Company  as  early  as  1853,  and  it  was  adopted  by  that 
company  in  1870  as  an  appropriate  method  for  controlling 
the  Pennsylvania  lines  west  of  Pittsburg. 

From  this  time  on  it  became  a  fairly  common  instru- 
ment by  which  business  enterprises,  especially  in  the  rail- 
road field,  were  consolidated  into  one  organic  union.  Until 
1888,  however,  it  was  necessary  to  obtain  special  authori- 
zation for  the  purpose  of  holding  shares  of  stock  in  other 
corporations.  In  that  year  the  State  of  New  Jersey  provid- 
ed by  an  amendment  to  the  corporation  act  that  companies 
chartered  under  her  laws  might  in  certain  cases  hold  stock 
in  other  corporations.  In  1889  the  law  was  further  amend- 
ed by  providing  that  corporations,  where  their  charter  so 
provided,  might  hold  stock  in  corporations  in  which  they 
were  directly  interested,  and  in  1893  the  act  was  made  gen- 
eral, pennitting  any  corporation  to  hold  stock  in  any  other 
corporation. 

The  holding  corporation  then  became  the  direct  succes- 
sor of  the  trust.  It  was  not,  however,  adopted  in  a  general 
way  until  about  ten  years  after  it  was  first  generally  au- 
thorized, but  during  the  period  from  1898  to  1901  a  large 
number  of  holding  corporations  were  organized  and  since 
that  time  it  has  become  a  characteristic  form  of  organizing 
business  enterprises  into  a  permanent  form  of  union. 

In  its  structure  the  holding  corporation  is  identical  with 
the  ordinary  corporation.  It  is  composed  of  a  group  of 
shareholders  who  own  stock,  elect  the  directors,  receive 
the  dividends,  and  possess  the  same  rights  and  are  under 
the  same  obligations  as  the  shareholders  of  a  regular  cor- 
poration. It  differs  however  in  one  important  respect.  Its 
property  account  is  made  up  of  shares  of  stock  in  one  or 
more  corporations  rather  than  the  real  estate,  buildings, 
and  other  assets  of  the  ordinary  corporation.  The  holding 
corporation  receives  its  income  from  the  dividends  declared 
by  the  corporations  whose  shares  it  holds,  and  such  income 


MODERN  BUSINESS  ORGANIZATION         183 

is  then  declared  out  in  dividends  to  its  own  shareholders. 
Like  the  trust  the  directors  of  the  holdino^  corporation  elect 
the  directors  of  the  subordinate  corporations  and  thus  are 
able  to  determine  the  business  policy  of  each  one  of  its 
subsidiary  companies.  Furthermore,  the  directors  of  the 
holding  corporation,  through  the  directors  of  the  subsid- 
iary corporations,  have  the  power,  and  generally  make  use 
of  it,  to  direct  the  operations  of  the  subordinate  companies 
in  accordance  with  the  general  plan  of  administration,  pro- 
vide for  a  general  purchasing  department,  a  general  sales 
department  and  a  general  accounting  department,  and 
for  the  organization  under  a  centralized  office  of  all  the 
manufacturing.  The  holding  corporation  thus  indirectly 
controls  not  only  the  business  policy,  but  the  actual  operat- 
ing organization  of  each  one  of  the  companies  in  which  it 
holds  a  majority  of  the  stock. 

It  will  be  noticed  that  the  holding  corporation  may,  by 
extending  the  sphere  of  its  influence,  gain  control  of  an  en- 
tire industry  and  thus  become  a  practical  monopoly.  On 
this  account  certain  of  the  holding  corporations  have  been 
attacked  under  the  Shennan  Anti-Trust  Law  which  de- 
clares eveiy  contract  or  combination  in  the  form  of  a  trust 
or  otherwise,  or  conspiracy  in  restraint  of  commerce  among 
the  states,  illegal.  Under  the  authority  of  the  Shennan 
act,  one  of  the  most  powerful  of  the  holding  corporations, 
namely,  the  Northern  Secunties  Company,  was  dissolved 
and  a  number  of  others  are  now  before  the  L^nited  States 
Supreme  Court  for  judicial  decision.  Wliile  monopolistic 
holding  corporations  may,  through  the  activity  of  the  Fed- 
eral Government,  be  dissolved,  it  is  apparent  that  unless 
they  attain  a  monopol}-,  holding  coi'porations  are  legal  in- 
stmments  for  centralizing  both  the  proprietorship  interests 
and  the  operating  organizations  of  those  business  enter- 
prises which  desire  to  associate  together  in  this  way. 


184  MAURICE  H.  ROBINSON 

The  Leasing  Company. 

In  this  f  oral  of  organization  one  of  the  companies,  gener- 
ally the  one  in  the  more  dominant  position,  leases  those 
companies  with  whom  it  seems  desirable  to  form  an  organic 
union.  The  lease  may  be  either  for  a  temporary  period  or 
for  so  long  a  period  that  it  practically  amounts  to  a  perpet- 
ual relation.  The  leases  are  of  two  kinds:  First,  the  di- 
rect money  rental,  and  second,  the  contingent  lease.  In  the 
first  type,  all  of  the  net  revenue  arising  from  the  operation 
of  the  second  company  accrue,  to  the  leasing  company.  In 
the  second  type,  the  profits  are  shared  between  the  two 
companies  in  accordance  with  the  terms  of  the  contingent 
lease.  In  either  case  the  leasing  company  controls  both 
the  business  policy  and  the  operating  organization  of  the 
company  which  it  has  leased. 

The  lease  system  has  been  used  chiefly  among  rail- 
roads, and  in  many  cases,  owing  to  the  difficulty  of  fixing  the 
terms  of  the  lease,  the  central  company  has  been  obliged  to 
purchase  a  considerable  portion  of  either  shares  or  bonds 
in  order  to  make  the  terms  of  the  lease  sufficiently  favor- 
able to  itself.  It  is  obvious,  of  course,  that  whenever  a 
railroad  becomes  involved  in  financial  troubles,  it  is  par- 
ticularly easy  for  some  stronger  railroad  operating  in  the 
same  territory  to  either  purchase  a  partial  interest  in  it 
or  advance  money  to  it  and  thus  be  in  a  position  to  dictate 
the  terms  of  the  lease.  In  the  case  of  manufacturing  and 
commercial  establishments  the  lease  system  has  never  be- 
come of  great  importance. 

The  Community  of  Interests. 

The  original  Standard  Oil  Trust  was  formed  in  1879. 
A  group  of  men  interested  in  the  petroleum  industry  had 
gradually  purchased  a  partial  or  controlling  interest  in  a 
considerable  number  of  refineries.  There  was  thus  no  or- 
ganic union  between  these  business  enterprises,  but  on  ac- 


MODERN  BUSINESS  ORGANIZATION         185 

count  of  common  o\\Tiersliip  the  virtual  consolidation  of 
the  various  companies  was  brouj^ht  ahmit. 

Such  an  informal  organization  is  known  as  a  commun- 
ity of  interests.  This  method  of  imiting  business  enter- 
prises has  been  adopted  in  a  considerable  number  of  cases 
where  no  direct  form  was  found  feasible.  In  1902,  when 
the  Northern  Securities  Company  was  dissolved  by  order 
of  the  Supreme  Court,  the  continuation  of  the  control  ex- 
ercised over  the  general  administration  of  the  Northern 
Pacific  and  the  Great  Northern  Company  was  perpetuated 
by  this  i^rinciple.  The  stock  held  by  the  shareholders  of 
the  Northern  Securities  Company  was  called  in  and  de- 
stroyed and  in  return  for  these  certificates  a  proportionate 
interest  in  both  of  the  companies  was  transferred  to  the 
Northern  Securities  Company  shareholders.  Thus  the  two 
companies  had  a  common  body  of  shareholders  or  a  com- 
mimity  of  interests.  The  community  of  interests  enables 
a  common  group  of  shareholders  in  several  companies  to 
dominate  and  control  the  business  policy  of  the  company, 
but  ordinarily  does  not  permit  of  the  inauguration  of  a 
centralized  administration.  It  therefore  is  used  only  when 
no  other  form  of  union  is  practicable. 

The  Merger. 

Under  certain  circumstances  the  union  of  related  com- 
panies may  become  so  complete  and  permanent  that  it  is 
thought  desirable  to  abolish  the  corporate  organization  of 
the  subordinate  companies,  transfer  their  assets  to  the 
central  company  and  thus  bring  about  a  complete  merger  of 
all  of  the  companies  in  the  organization  into  one  permanent 
union,  generally  in  the  corporate  form.  In  such  cases  the 
organization,  both  from  the  internal  and  the  operating 
standpoint  reverts  back  to  the  original  type  of  the  ordi- 
nary corporation. 


186  MAURICE  H.  ROBINSON 

VIL    BUSINESS  EFFICIENCY. 

Business  enterprises  are  organized  and  managed,  under 
the  present  system  of  industrial  economy,  for  the  purpose 
of  earning  interest  and  profits  and  ultimately  distributing 
the  same  in  the  form  of  cash  payments  to  the  proprietor  or 
to  the  partners,  or  in  dividends  to  the  stockholders.  In 
order  to  secure  this  end  the  capital  contributed  by  the  pro- 
prietors or  shareholders  must  be  invested  in  land,  build- 
ings, machinery,  and  other  equipment,  and  the  business  es- 
tablishment thus  created  must  be  operated  with  business 
as  well  as  technical  efficiency. 

It  will  be  noticed  in  the  first  place  that  efficient  business 
managers  will  not  be  content  with  turning  out  finished 
goods;  they  wiU  turn  out  goods  that  are  wanted  by  the  mar- 
ket to  which  they  cater.  For  example,  it  would  be  entire- 
ly possible  for  a  Parisian  modiste  to  establish  a  branch 
shop  in  the  heart  of  China  or  Japan,  stock  it  with  the 
choicest  fabrics  of  the  French  mills,  place  it  in  charge  of 
the  most  expert  designers  and  workmen  and  thus  fashion 
garments  of  wonderful  beauty  and  style  when  viewed  from 
the  continental  point  of  view.  But  the  creations  of  his 
shop  would,  it  is  needless  to  say,  be  a  drug  upon  the  mar- 
ket, while  the  clothes  made  in  the  native  shops  would  find 
ready  sale  at  remunerative  prices.  The  Parisian  shop 
might,  it  is  conceivable,  be  operated  with  the  greatest  pos- 
sible technical  efficiency  and  yet  be  a  complete  failure  from 
the  standpoint  of  business  efficiency. 

In  the  second  place,  the  goods  produced  must  not  only 
be  adapted  to  the  needs  of  the  customers,  but  they  must 
also  be  limited  in  quantity  to  meet  the  normal  requirements 
of  the  market.  This  is  the  natural  result  of  two  conditions : 
As  the  output  of  any  commodity  increases  in  quantity  the 
cost  per  unit  decreases  for  a  time  until  a  point  is  reached 
where  the  conditions  of  manufacture  are  most  favorable 
and  consequently  the  total  combined  costs  reach  a  mini- 


MODERN  BUSINESS  ORGANIZATION 


187 


mum.  From  this  point  on,  the  costs  may  remain  constant 
for  a  time,  but  in  every  case  as  the  quantity  increases  be- 
yond a  certain  point,  the  cost  per  unit  also  increases  either 
slowly,  moderately,  or  at  a  rapid  rate.  For  example,  it  is 
more  expensive  to  make  one  saw  or  one  cake  of  soap  than 
to  make  saws  or  cakes  of  soap  in  considerable  quantities. 
After  a  factory  has  reached  a  certain  size,  however,  both 
saws  and  soap  can  be  manufactured  at  a  minimum  cost. 
After  this  point  the  cost  per  unit  necessarily  increases  as 
the  materials  and  labor  necessary  for  its  production  be- 
come relatively  more  scarce  and  therefore  more  expensive. 
Secondly,  as  the  output  increases  the  selling  price  neces- 
sarily must  be  lowered  until  the  enterprise  becomes  bank- 
rupt owing  to  its  inability  to  sell  its  output  at  a  price  equal 
to  the  cost  of  production.  This  condition  may  be  illustrated 
by  a  diagram  in  w^hich  the  several  factors  are  represented 
by  lines,  as  follow^s: 


y 

.  > 

3' 

\b   1 

< 

c' 

s 

s 

d' 

N 

^ 

20 
Id 
16 
14 
12 
10 
6 
6 
A- 
2 

r 

\ 

i 

y 

s 

h' 

/ 

V. 

s 

N, 

li' 

., 

/ 

^H 

^ 

Lg. 

'■ 

*— 1 

y 

y 

<r 

s-i 

r 

m' 

X 

r^ 

^ 

j^ 

^ 

p' 

t 

r^ 

^ 

1 

jj^ 

yi 

<\' 

, 

W 

^ 

r 

m 

rT 

n^ 

r""-. 

.s' 

t^ 

y-i 

!t- 

r" 

r 

r 

s 

e- 

^ 

-  r 

y/- 

■  ^ 

, 

y 

0 

2 

5 

5 

0 

7 

5 

IC 

>0 

y* 

2r 

-^ 

a--Z   COST  OF  PRODUCTION  CURVE 
a--Z'  PRICE  CURVE 

a--a',  f-f'-K-k'  r-r\  etc, profit  per  unit 
u--u;  w-v/'  y-y' ETC., LOSS  per  unit 


In  the  diagram  the  quantity  produced  in  units  per  day  is 
reckoned  along  the  base  line  Ox  while  both  the  cost  of  the 


188  MAURICE  H.  ROBINSON 

goods  and  the  selling  price  per  unit  are  reckoned  upon  the 
upright  Oy.  At  first,  the  cost  of  production  is  high  owing 
to  the  disadvantages  of  operating  on  a  small  scale.  At 
S  the  minimum  cost  of  production  is  reached,  and  after  this 
point  the  cost  per  unit  steadily  increases.  When  only  a 
small  number  of  units  is  produced  and  sold,  the  price  of  each 
unit,  owing  to  its  scarcity,  is  relatively  high,  and  although 
the  cost  of  each  unit  is  also  high  the  profit  per  unit  is  large. 
The  unusual  profits  attract  the  attention  of  promoters  and 
capitalists,  and  consequently  companies  are  formed  and 
plants  are  built  for  the  purpose  of  manufacturing  such 
goods  and  securing  a  share  of  the  abnormal  profits,  with 
the  double  result  that  both  the  selling  price  and  the  cost 
of  production  are  reduced  as  the  output  increases,  as  sho^vn 
in  the  diagram.  At  95  units  per  day  the  cost  equals  the 
selling  price,  while  beyond  this  point  the  cost  exceeds  the 
price  which  can  be  realized  provided  the  entire  output  be 
sold.  Under  such  circumstances  business  managers  gen- 
erally withhold  a  part  of  the  stock  in  order  to  maintain  the 
price  above  the  cost  of  production,  and  shut  down  their 
factories  and  wait  until  the  stocks  on  hand  are  nearly  ex- 
hausted. Every  increase  in  technical  efficiency  beyond  a 
certain  point  tends  to  ruin  financially  the  industry  within 
which  it  occurs  unless  each  enterprise  within  the  industry 
is  managed  with  corresponding  business  efficiency. 

In  the  third  place,  while  technical  efficiency  may,  unless 
wisely  managed,  bankrupt  an  entire  industry,  such  effi- 
ciency is,  in  the  case  of  individual  plants  within  an  industry, 
one  of  the  factors  of  permanent  success.  This  results  from 
the  following  conditions:  The  output  of  any  one  of  the 
numerous  plants  which  compose  the  industry  is  usually 
so  small  in  proportion  to  the  entire  output  that  any  increase 
in  its  own  production  does  not  appreciably  affect  the  price 
at  which  the  goods  can  be  sold.  On  the  other  hand,  owing 
to  the  fuller  utilization  of  its  plant  the  cost  of  production  is 
materially  reduced.    The  prime  object  of  every  individual 


MODERN  BUSINESS  ORGANIZATION         189 

enterprise  is  thus  to  increase  its  technical  efficiency  as  well 
as  its  business  efficiency,  since  in  this  way  the  greatest  profit 
to  its  own  proprietors  is  secured.  When  technical  efficiency 
becomes  general  in  any  industry,  the  profits  grow  gradually 
less,  and  consequently  more  attention  relatively  must  be 
given  to  the  problems  which  affect  the  industry  as  a  whole 
and  less  to  those  affecting  individual  plants.  The  success 
of  each  individual  enterprise,  then,  depends  upon  both 
technical  and  business  efficiency.  Such  efficiency  is  secured 
by  producing  goods  at  the  lowest  ]X)Ssible  cost  and  selling 
them  at  the  highest  price  consistent  with  maintaining  per- 
manent relations  with  the  purchasers  of  its  goods. 

The  Cost  of  Production. 

In  a  preceding  section  the  factors  of  production  were 
enumerated  and  the  fimction  of  each  described.  These 
factors  are,  it  will  be  recalled,  land,  capital,  labor  and  enter- 
prise. In  most  instances  the  co-operation  of  all  these  fac- 
tors is  necessary  for  the  production  of  commodities,  and  in 
all  cases  such  co-operation  is  required  to  secure  production 
at  a  low  cost.  It  will  therefore  be  necessary  to  consider 
each  of  these  factors  from  the  standpoint  of  production  and 
find  the  conditions  under  which  they  co-operate  most  effi- 
ciently. 

Efficiency  in  Investment.  Under  the  present  system  of 
industrial  economy  the  managerial  class  determines  first, 
the  relative  proportions  in  which  land,  capital  and  labor 
shall  be  united  for  the  puq^ose  of  manufacturing  goods  or 
rendering  services  to  the  general  market,  and  second,  the 
location,  character  and  equipment  of  the  manufacturing 
plant.  For  example,  assuming  that  a  group  of  business 
men  come  to  the  conclusion  that  automobiles  are  selling 
above  the  cost  of  production,  and  that  even  if  others  engage 
in  this  business  there  is  likely  to  be  an  opportunity  for 
earning  unusual  profits,  they  decide  to  embark  in  this  par- 
ticular industry.    They  then  deteiminc  upon  the  general 


190  MAURICE  H.  ROBINSON 

plan  of  operation,  open  subscription  books,  secure  promises 
for  a  sufficient  amount  of  funds  to  engage  in  the  manufac- 
ture of  motor  cars,  incorporate  under  the  laws  of  some  state, 
elect  directors,  select  officers,  and  authorize  the  manage- 
ment to  take  the  necessary  steps  to  begin  the  actual  manu- 
facture of  motor  vehicles.  Assuming  further  that  the  mini- 
mum amount  on  which  it  is  desirable  to  undertake  this  en- 
terprise is  $5,000,000,  and  that  the  total  amount  has  been 
subscribed,  the  status  of  the  company  at  this  time  is  shown 
by  the  following  balance  sheet: 

ILLINOIS  AUTOMOBILE  CORPORATION. 

Balance  Sheet  Before  Investment, 

Assets.                                                            Liabilities. 
Subscriptions   $5.000,000      Capital   Stock    $5,000,000 

The  management,  composed  in  this  case  of  the  directors, 
acting  for  the  corporation  upon  the  advice  usually  of  the 
executive  officers,  consider  first  the  question  of  plant  loca- 
tion. 

Location  of  the  Plant.  The  first  question  asked  will  be: 
Where  is  the  best  site  on  which  to  locate  an  automobile 
factory"?  The  answer  to  this  question  will  depend  upon  a 
number  of  conditions  all  of  which  must  be  given  their 
proper  consideration,  such  as:  First,  the  value  of  a  site  of 
the  proper  size  to  permit  of  the  erection  of  an  economical 
factory;  second,  the  relative  cost  of  erecting  such  a  factory 
on  different  sites;  third,  the  cost  of  raw  materials  at  this 
point;  fourth,  the  cost  of  transporting  the  machines  to  pros- 
pective markets;  fifth,  the  character  of  the  artisan  class 
in  the  vicinity;  sixth,  insurance  rates  in  the  locality;  and 
seventh,  the  present  situation  and  future  probabilities  in 
regard  to  restrictive  regulations. 

That  location  should,  of  course,  be  selected  where  the 
sum  of  all  these  costs  is  likely  to  be  the  least,  not  necessarily 
at  the  present  time,  but  for  a  considerable  period  of  time  in 
the  future;  and  also  where,  should  it  be  desirable  to  move, 


MODERN  BUSINESS  ORGANIZATION         191 

the  factory  might  be  sold  to  the  Ix'st  advantage  for  other 
industrial  purposes.  Since  other  manufacturers  are  likely 
to  be  looking  for  the  same  kind  of  location,  especially  rival 
automobile  manufacturers,  the  contest  for  choice  locations 
^vill  cause  the  annual  rent,  and  consequently  the  selling 
value,  of  such  sites  to  advance  until  it  may  be  better  to 
select  a  location  less  valuable  intrinsically  at  a  lower  price, 
and  thus  save  in  rent  somewhat  more  than  is  lost  in  the 
higher  annual  cost  of  operation.  Again,  it  will  usually  be 
found  mistaken  policy  to  locate  at  a  distance  from  both  ma- 
terials and  the  market,  and  thus  burden  the  company  with 
heavy  transportation  charges,  for  the  purpose  of  saving  on 
the  original  cost  of  the  land.  In  this  industry  it  is  of  course 
not  necessary  to  locate  the  factory  in  a  large  city,  since  the 
company  must  maintain  show-rooms  or  distriljute  its  pro- 
duct through  dealers  located  in  all  the  important  cities  and 
towns  where  such  goods  are  sold. 

The  labor  market^is  of  course  a  very  different  proposi- 
tion. It  takes  more  than  one  generation  to  develop  a  class 
of  skilled  artisans  and  such  a  class  is  absolutely  essential  to 
efficient  production.  Furthei-more,  competent  superintend- 
ents usually  come  from  the  artisan  class,  and,  while  it  is  less 
difficult  to  induce  higher  salaried  officers  to  migrate  from 
one  place  to  another,  it  is  always  a  slow  and  usually  an  un- 
satisfactory process.  Consequently  it  is  usually  desirable 
to  locate  in  the  midst  of  a  trained  body  of  skilled  workmen. 
The  Factory.  The  character  of  the  location  affects  in 
an  important  way  the  kind  of  factory.  Where  land  is  cheap 
the  ideal  factory  covers  a  considerable  area ;  where  land  is 
dear,  the  necessary  floor  space  is  secured  by  erecting  tall 
buildings  with  many  stories.  In  the  first  case  efficiency  in 
manufacturing  can  be  secured  only  by  so  arranging  the 
factory  that  the  processes  or  steps  in  the  manufacturing 
may  form  a  connected  chain  from  the  tracks  on  which  the 
raw  material  is  received  through  the  factory  to  the  assem- 
bling room,  and  finally  to  the  track  on  which  the  finished 


192  MAURICE  H.  ROBINSON 

machines  are  shipped  to  the  warehouses  or  to  the  various 
show-rooms  where  they  are  to  be  sold.  In  the  second  case 
the  transportation  problem  is  solved  more  largely  through 
the  elevator  system,  although  a  proper  arrangement  of  the 
floors  and  the  spaces  in  each  is  important.  Owing  to  the 
well-known  fact  that  the  cost  of  erecting  a  factory  with  a 
given  floor  space  increases  with  the  added  stories,  after  a 
certain  height  is  reached,  the  actual  cost  of  a  building  of  a 
given  capacity,  as  well  as  the  land  upon  which  it  is  located, 
is  likely  to  be  greater  in. a  city  than  in  the  country.  Con- 
sequently the  site  must  offer  sufficient  attractions  in  the 
way  of  cheaper  material,  cheaper  labor,  or  a  better  market, 
to  offset  this  handicap.  On  the  other  hand,  the  higher  the 
building  the  less  relatively  is  the  cost  of  the  land.  Conse- 
quently, manufacturers,  after  determining  upon  the  loca- 
tion, must  decide  upon  the  relative  amount  of  capital  to 
invest  in  the  land  as  compared  with  that  invested  in  the 
building.  In  a  growing  city  additional  land  usually  costs 
more  than  the  extra  cost  of  additional  floor  space  in  the 
upper  stories.  Therefore  when  the  operations  of  a  factory 
can  be  economically  conducted  in  a  high  building,  the  man- 
agement should  provide  for  such  a  structure.  Where  the 
operations  can  be  more  economically  carried  on  upon  the 
ground  floor,  the  management  should  hesitate  long  before 
loading  all  future  products  with  the  handicap  that  comes 
from  manufacturing  in  a  building  not  suited  to  the  industry. 
Character  of  the  Building.  Irrespective  of  the  shape, 
whether  low  and  broad  or  narrow  and  high,  the  character 
of  the  structure  is  a  matter  of  first  importance.  From  the 
technical  point  of  view  the  factory  should  be  perfectly 
adapted  to  the  purposes  for  which  it  is  intended  and  con- 
structed so  that  annual  repairs,  danger  from  fire  and  other 
hazards,  are  reduced  to  a  minimum.  From  the  business 
standpoint,  however,  other  considerations  must  enter  in, 
some  of  which  may  materially  modify  the  conclusions 
reached  above.    Ordinarily  the  better  the  structure,  the 


MODERN  BUSINESS  ORGANIZATION         193 

more  capital  must  be  put  into  tlio  ])nil(linp^  and  ronsequently 
less  will  be  left  for  equipment  and  operation.  ^Foreover, 
commerce  and  industry  are  subject  to  changes  wliicli  are  im- 
possible to  be  foreseen,  and  therefore  cai)ital  once  invested 
in  a  factory  may,  in  the  course  of  a  comparatively  few  years, 
prove  to  have  been  either  unfortunately  located  or  unsuited 
to  the  particular  business  for  which  it  was  intended.  Such 
capital  is  partially,  at  least,  wasted  and  from  the  purely 
business  standpoint  the  profits  of  the  industry  mip^ht  have 
been  increased  by  the  full  amount  of  the  wasted  capital  by 
erecting  an  equally  convenient  factory,  warehouse,  etc., 
etc.,  at  less  initial  expenditure. 

Wliere  the  business  is  likely  to  be  peraianent,  and  where 
the  location  selected  is  also  likely  to  be  as  well  adapted  to 
the  purposes  of  the  company  in  the  future  as  at  the  present 
time,  the  business  and  the  technical  ideas  in  regard  to  a 
proper  building  are  identical.  In  all  other  cases  a  technic- 
ally pei-fect  building  must  be  sacrificed  and  such  a  structure 
erected  as  is  likely  to  secure  the  greatest  possible  business 
efficiency. 

Size  of  the  Building.  It  will  be  assumed  that  whatever 
the  size  of  the  factory  the  building  will  be  fully  utilized  and 
consequently  the  annual  product  of  the  company  is  stiictly 
limited  by  the  size  of  its  plant.  On  this  account  it  is  neces- 
sary to  detei-mine  in  advance  the  number  of  units,  in  this 
case  the  nimiber  of  motor  cars,  which  must  be  manufactured 
annually  in  order  to  secure  the  lowest  practi(^al  c(^st  of  pro- 
duction. Let  us  assume  that  the  number  is  found  to  be  ap- 
proximately 5,000  cars;  then  the  factory  with  a  capacity 
sufficient  to  enable  the  company  to  turn  out  at  least  that 
number  should  be  planned.  However,  it  is  usually  desirable 
to  build  somewhat  larger  than  present  conditions  demand 
for  the  following  reasons: 

1.  The  sale  of  manufactured  articles  of  each  class, 
especially  of  recently  introduced  articles,  is  likely  to  in- 

B.II— 13 


194  MAURICE  H.  ROBINSON 

crease  somewhat  faster  than  the  increase  in  population  of 
the  adjacent  country. 

2.  That  improvements  in  manufacturing  processes  and 
the  size  of  the  factory  giving  the  most  economical  produc- 
tion, are  likely  to  increase  rather  than  the  reverse. 

3.  It  is  usually  more  economical  to  build  a  plant  with 
the  maximum  capacity  required  during  a  period  of  say  ten 
years  in  advance  rather  than  to  make  periodical  additions 
to  meet  the  needs  of  the  growing  industry. 

4.  The  inability  of  any  manufacturer  to  take  care  of 
all  the  business  that  comes  to  him,  as  a  result  of  an  unusual 
demand  for  the  goods  he  produces,  causes  his  customers 
inconvenience  and  often  business  losses,  and  this  condition 
leads  to  the  establishment  of  rival  plants,  increasing  the 
competition  and  lessening  profits. 

The  Equipment.  It  is  needless  to  say  that  business,  as 
well  as  technical  efficiency,  usually  demands  the  best  equip- 
ment that  the  market  affords.  There  are,  however,  limita- 
tions to  this  generally  accepted  maxim.  In  making  use  of 
his  factory  every  manufacturer  has  an  option  between  the 
two  following  methods :  He  may  install  more  labor-saving 
machinery  and  correspondingly  lessen  his  labor  force  and 
his  annual  payroll;  or,  he  may  do  without  such  machinery 
and  appliances  and  increase  the  number  of  men  employed, 
thus  saving  in  the  use  of  capital  while  increasing  the  wage 
element  in  his  annual  charges. 

From  a  purely  technical  point  of  view  the  company  will 
choose  whatever  course  will  provide  the  most  perfect 
articles.  From  the  standpoint  of  business  efficiency,  how- 
ever, the  manufacturer  finds  that,  while  perfect  goods  usu- 
ally do  not  pay,  it  is  often  possible  to  make  large  profits  by 
turning  out  inferior  articles.  Although  machinery  may  not 
be  able  to  compete  with  the  skilled  artisan  in  quality,  it  may 
so  far  outstrip  him  in  quantity  that  its  use  is  absolutely 
necessary  for  business  success.  In  still  other  cases  the  ma- 
chine is  absolutely  necessary  for  the  manufacture  of  certain 


MODERN  BUSINESS  ORGANIZATION         195 

kinds  of  goods.  For  example,  cotton  and  woolen  clothes, 
steel  rails,  and  certain  other  products  of  iron  and  steel, 
some  products  of  rubber,  etc.,  etc.  In  such  cases  the  man- 
agement must  invest  in  the  necessary  machinery  in  order  to 
manufacture  the  goods  at  all.  The  efficient  business  man- 
ager will  invest  in  machines  of  a  character  that,  con- 
sidering the  total  capital  invested,  the  location  and  kind  of 
building,  the  character  of  the  workmen  and  the  rate  of 
wages,  will  in  the  long  run  yield  the  greatest  possible  rate 
of  profits. 

In  addition  to  machinery,  business  establishments  re- 
quire a  considerable  investment  in  tools  and  in  this  case  the 
best  usually  give  the  best  business  results.  AA^ile  it  is  pos- 
sible to  economize  in  the  location  of  the  plant,  and  in  many 
cases  in  the  machinery,  it  is  always  bad  business  policy  to 
use  cheap  tools.  Moreover,  it  is  also  usually  bad  business 
policy  to  economize  too  much  in  the  number  of  tools.  Both 
the  shop  and  the  office  should  be  supplied  with  an  adequate 
quantity  of  the  best  tools  in  order  to  secure  business  effi- 
ciency. 

A  third  line  of  equipment,  often  neglected  at  the  expense 
of  future  earning  power,  is  the  transportation  facilities 
wuthin  the  plant.  These  involve  not  only  elevators,  which 
are  usually  well  provided,  but  traveling  cranes,  tracks,  cars 
and  other  conveniences  for  the  conveyance  of  tools,  mate- 
rials, and  partially  finished  product  from  the  point  of  re- 
ceipt, through  the  warehouse,  to  the  factory  and  to  the  rail- 
road or  street  for  delivery  to  the  purchaser.  Fortunately 
a  part  of  the  equipment  can  be  erected  on  the  installment 
plan,  without  serious  disadvantages.  For  example,  cranes, 
machines,  etc.,  etc.,  can  be  purchased  as  needed,  and  placed 
in  position  for  operation  as  needed,  provided  the  factory 
has  been  organized  with  this  plan  in  view,  thus  savine:  ap- 
preciably in  the  initial  investment  of  capital.  The  ideal 
factory  will  not  only  be  provided  with  the  most  convenient 
transportation  facilities  for  the  rapid  movement  of  ma- 


196  MAURICE  H.  ROBINSON 

terials,  tools,  etc.,  but  will  also  be  so  arranged  as  to  reduce 
the  actual  amount  of  transportation  within  the  factory  to 
the  least  possible  terms.  Some  recent  factories  ai'e  models 
in  this  respect. 

Power,  Heat  and  Light.  Power,  heat  and  light  may  be 
furnished  either  by  the  company  itself,  or  in  many  cases 
produced  by  some  other  company  whose  business  is  that  of 
producing  these  commodities  for  sale.  When  heat,  light 
and  power  can  be  purchased,  the  efficient  business  manager 
will  choose  the  method  that  enables  him  to  produce  his 
goods  at  the  least  j)ossible  cost.  Fortunately  it  is  usually 
possible  to  determine  this  question  at  the  time  the  plant 
is  being  erected  and  thus  to  avoid  the  waste  caused  by 
equipping  the  plant  for  furnishing  one  or  all  of  these  com- 
modities and  then  finding  that  it  is  less  expensive  to  buy 
the  same  of  some  comj)any  that  is  established  and  fitted  up 
for  that  iDurpose.  To  make  the  proper  comparison  it  is  of 
course  necessary  to  charge  to  this  department  not  only 
the  cost  of  actual  repairs,  depreciation,  materials  and 
labor  consumed,  but  its  proportion  of  the  administra- 
tion expenses,  ground  rent,  and  interest  on  investment. 
Having  from  these  items  calculated  the  actual  cost,  they 
should  then  find  the  annual  expense  of  buying  the  same 
from  other  companies  which  supply  these  articles.  The 
efficient  manager  will  of  course  choose  the  less  expensive. 
In  either  case,  the  arrangement  of  the  factory,  for  the  pur- 
pose of  securing  proper  lighting  for  the  machinery  must 
be  taken  into  consideration. 

Investment  Accounting. 

Applying  the  general  principles  stated  in  the  preceding 
sections  let  us  assume  that  for  the  purposes  of  the  corpora- 
tion the  directors  find  that  the  proper  location  will  cost 
$250,000,  that  the  buildings  will  require  an  additional  $750,- 
000,  and  that  it  is  more  economical  to  manufacture  the 
power  than  to  buy  it,  and  that  on  this  account  the  total 


MODERN  BUSINESS  ORGANIZATION         197 

equipment  including;  niacliiiiorv,  furnaces,  hollers,  office 
fixtures  and  furniture,  will  necessitate  an  investment  of 
$1,000,000.  After  the  land  is  purchased  and  the  huilding 
erected  and  equipped  the  following  balance  sheet  shows  tlie 
condition  of  the  corporation  from  the  purely  investment 
standpoint. 

ILLINOIS  AUTOMOBILE  CORPORATION. 

Balance    Sheet   After    Investment   of   iMxed    Capital. 

Assets.  Liabilities. 

Land   at    cost    " $    250.000      Capital    Stock    $5,000,000 

Buildings  at  cost    750.000 

Equipment    at    cost     1,000,000 

Subscriptions      3,000,000 

Total      .$5.000.000  $5.000,000 

The  balance  sheet  as  shown  above  while  entirely  correct 
from  the  investment  point  of  view  is  wholly  inadequate  for 
the  purposes  of  determining  business  efficiency.  Since  the 
company  is  undertaking  a  variety  of  functions,  it  is  neces- 
sary to  further  subdivide  and  re-arrange  the  accounts  for 
the  purpose  of  showing  the  total  investment  in  each  of  the 
following  lines: 

1.  The  Office.  4.    Warehouse    for    storing   raw    ma- 

2.  The  Factory.  ^     Warehouse    for    storing    finished 

3.  The   Power  Plant.  goods. 

Further,  in  many  cases  it  is  necessary  to  subdivide  the 
factory  into  its  natural  divisions  on  the  basis  of  the  work 
carried  on  within  its  various  parts,  and  to  charge  each  of 
these  divisions  with  its  share  of  the  total  investment.  This 
allotment  should  ])e  made  on  the  basis  of  a^  aial  cost,  so  far 
as  possible,  and  wherever  this  method  is  not  feasil)le,  on  the 
basis  of  space,  location  and  character  of  building.    After 


198  MAURICE  H.  ROBINSON 

this  division  has  been  made  the  balance  sheet  will  appear  as 
follows : 

ILLINOIS  AUTOMOBILE  CORPORATION. 

Balance  Sheet  Showing  Investments  on  Efficiency  of  Business  Basis. 

Assets.  Liabilities. 

Office    Investment    $60,000      Capital  Stock $5,000,000 

Land    $  10,000 

Buildings     25,000 

Equipment    25,000 

Factory   Investment    1,500,000 

Land    150,000 

Buildings     550,000 

Equipment   800,000 

Power   Plant    165,000' 

Land    15,000 

Buildings     50,000 

Equipment   100,000 

Warehouse    No.    1 175,000 

Land     50,000 

Building    75,000 

Equipment   50,000 

Warehouse  No.  2 100,000 

Land    25,000 

Building    50,000 

Equipment   25,000 

Subscriptions   3,000,000 

$■'^■000.000  $5,000.000 

Whenever  it  is  desirable  to  test  the  efficiency  of  any 
branch  of  the  factory  this  principle  of  apportioning  the  in- 
vestment to  the  various  parts  must  be  applied,  assigning  to 
each  part  its  share  in  the  total  investment. 

Raw  Materials. 

It  has  been  assumed  in  the  foregoing  discussion  that  the 
corporation  proposes  to  purchase  its  materials  in  the  un- 
finished state  from  other  producers  and  consequently  needs 
storage  room  only.  Within  the  past  fifty  years,  however,  in 
many  industries,  it  has  been  found  desirable  to  own  the 
source  of  the  chief  raw  materials  used,  and  consequently 
manufacture  the  more  important  parts  which  enter  into 
the  finished  product.  Whether  or  not  this  method  of  obtain- 
ing material  conforms  to  the  standards  of  business  effi- 
ciency depends  upon  the  relative  cost  of  such  articles  to 


MODERN  BUSINESS  ORGANIZATION         199 

the  corporation.  Hence  it  is  necessary  whenever  this  plan 
is  followed  to  keep  the  investment  in  mines,  forests,  etc., 
entirely  separate  and  treat  each  of  these  })ranehes  of  the 
business  exactly  as  if  it  were  an  independent  establishment. 
In  this  way  the  cost  of  furnishing  the  company  with  its 
iron,  coal,  lumber,  and  other  materials  in  the  natural  state, 
and  of  converting  them  into  the  form  necessary  for  use  in 
the  factory,  can  be  determined,  and  such  cost  compared 
^^'ith  the  ruling  price  for  such  articles  in  the  open  market. 

It  is  obvious  that  this  method,  w'hile  theoretically  pos- 
sible in  all  classes  of  industries,  has  from  the  practical  point 
of  view  narrow  limitations.  This  method  is  clearly  impos- 
sible in  the  flour  milling  industry  since  it  would  necessitate 
the  operation  of  sufficient  fann  acreage  to  grow  the  wheat 
milled  by  each  company.  Such  a  practice  would  involve 
one  of  two  difficulties :  Either  each  milling  company  would 
be  obliged  to  operate  small  mills  and  thus  fail  to  secure  the 
economies  resulting  from  milling  on  a  large  scale;  or  each 
would  be  obliged  to  engage  in  wheat  farming  on  an  exceed- 
ingly extensive  scale  and  thus  suffer  the  natural  penalties 
of  operating  a  business  over  an  extended  area  with  conse- 
quent loss  in  business  efficiency  owing  to  diffused  manage- 
ment with  its  inherent  wastes.  ^Moreover,  since  wheat 
lands  yield  the  best  results  when  other  crops  are  rotated 
w^ith  wheat,  the  company  would  be  compelled  to  lease  and 
operate  its  land  periodically,  or  it  must  either  own  the 
wheat  land  and  subrent  to  other  persons  for  a  part  of  the 
time,  or  undertake  the  manufacture  and  sale  of  the  crops 
which  are  grown  upon  the  land  in  the  years  when  it  is 
found  undesirable  to  grow  wheat.  Since  all  of  these  alter- 
natives are  impracticable,  flour  milling  and  other  similar 
industries  are  disbarred  from  adopting  this  method  of  pro- 
curing raw  material.  It  is  only  when  some  one  of  the  sev- 
eral classes  of  raw  material  is  used  in  large  quantities,  and 
when  such  materials  are  fairly  unifonn  in  quality,  that  this 
method  can  be  wisely  adopted.    Steel  manufacturers  have 


200  MAURICE  H.  ROBINSON 

in  most  cases  found  it  expedient  to  own  both  iron  and  coal 
mines  and  thus  furnish  the  two  most  important  materials 
for  their  operations.  Even  in  the  steel  business,  however, 
the  fear  that  rival  mauufactiu'ers  might  secure  control  of 
the  best  available  sources  of  supply  and  thus  monopolize 
the  whole  material  of  the  industry,  has  been  one  of  the 
principal  incentives  to  its  adoption. 

Provided  the  supply  of  raw  material  can  be  safeguarded 
from  monopolistic  control,  it  is  an  open  question  whether 
there  would  be  a  gain  in  real  business  efficiency  as  a  result 
of  the  steel  manufacturers  engaging  in  the  entirely  different 
occupation  of  mining  coal  and  iron.  In  most  industries 
the  production  of  all  the  various  parts  that  enter  into  the 
finished  product  is  controlled  directly  by  the  accepted 
principles  of  business  as  well  as  technical  efficiency.  The 
automobile  industry  clearly  belongs  with  the  general  class, 
and  consequently  we  may  assume  that  our  company  will 
not  engage  in  the  work  of  manufacturing  its  parts  from  the 
ground  up,  but  will  purchase  from  specialists  in  the  various 
lines  many  of  the  component  materials  which  go  to  make 
the  completed  machines.  Hence  the  stock  of  materials  in 
the  various  stages  of  manufacture,  up  to  and  including  the 
finished  cars,  will  be  fairly  large,  and  a  portion  of  the  cash 
coming  from  subscriptions  will,  before  the  beginning  of 
operations,  be  needed  for  this  purpose.  Assuming  for  il- 
lustration that  at  least  $2,000,000  mil  be  tied  up  in  this 
way,  the  condition  of  the  company  when  fully  under  way  is 
represented  by  the  follomng  balance  sheet. 

ILLINOIS  AUTOMOBILE  CORPORATION. 

Balance  Sheet  After  Operations  Are  Begun. 

Assets.  Liabilities. 

Office   Investment    $      60,000      Capital     Stock     $5,000,000 

Factory   In-vestment    1,500,000 

Power    Plant    165,000 

Warehouse   No.   1    175,000 

Warehouse  No.  2    100,000 

Materials,  raw,  partially  fin- 
ished, and   finished    2,000,000 

Cash    1,000,000  

$5,000,000  $5.000.000 


MODERN  BUSINESS  ORGANIZATION         201 

To  make  the  above  assumptions  conform  more  closely 
to  the  actual  conditions  of  the  ordinary  oporatino:  coi"]iora- 
tions  one  step  further  must  he  taken.  Business  corpora- 
tions usually  ])uy  and  sell,  partially  at  least,  on  credit  both 
materials  and  labor.  Hence  it  will  be  necessary  to  intro- 
duce credit  accounts  to  make  our  investment  conform  to 
actual  conditions.  Since  every  efficiently  manaj^^ed  com- 
pany pays  its  bills  promptly  and  takes  its  discounts,  while 
at  the  same  time  collecting  as  closely  as  commercial  con- 
ditions will  pennit,  we  shall  assume  that  the  automobile 
company  belongs  to  this  class.  Accordingly  its  accounts 
and  bills  payal)le  amount  to  only  $500,000,  its  unpaid  wage 
account  to  $50,000,  against  which  there  is  an  offset  of  $600,- 
000  for  accounts  and  bills  receivable  representing  cars  sold 
but  only  partially  paid  for.  The  balance  sheet  after  be- 
ginning operations  will  then  be  as  follows: 

ILLINOIS  AUTOMOBILE  CORPORATION. 

Balance  Sheet  During  Operation. 

Liabilities. 
Capital    Stock    $5,000,000 


Accounts  and  bills  payable.      500,000 

Accrued  wages    50,000 

Surplus 50,000 


Assets. 
Office   Investment    

.$      60,000 

Factory    Investment    .  . . 

.    1,500,000 

165,000 

175,000 

YVarehouse  No   2     

100,000 

Materials,  raw,  partially  fin 
ished  and  finished    

Accounts    and    Bills    Receiv 
able      

.    2,000,000 
.       600,000 

Cash    

.    1,000,000 

S.--). 600,000 

$5,600,000 
I  r 

Efficiency  of  Operation. 

With  a  plant  wisely  located,  properly  constructed  and 
equipped  for  j^roducing  a  marketal)le  article  or  articles,  the 
problem  of  business  efficiency  centers  around  the  operation 
of  the  esta])lishment,  the  production  of  saleable  commodities 
and  the  disposal  of  sueh  conunodities  at  the  best  possible 
price.    The  first  two  of  these  problems  deals  largely  with 


202  MAURICE  H.  ROBINSON 

the  labor  question,  while  the  third  is  chiefly  concerned  with 
making  the  price. 

The  Labor  Problem. 

When  a  man  works  for  himself  he  receives  directly  the 
entire  product  of  his  labor.  He  thus  has  every  possible  in- 
centive except  the  lash  to  work  regularly  and  efficiently. 
Under  the  present  system,  however,  the  great  majority  of 
men  sell  their  labor  for  a  stipulated  price  to  others  who  in 
turn  operate  the  business  in  which  they  are  employed  and 
sell  the  joint  products  of  labor  and  capital  in  the  open  mar- 
ket. The  reward  of  the  laborer  is  thus  only  indirectly  de- 
pendent upon  the  character  and  quality  of  his  work,  and 
thus  the  workmen  from  the  highest  salaried  officials  to  the 
unskilled  laborers  have  too  little  incentive  to  become  effi- 
cient in  their  daily  tasks. 

To  secure  efficiency,  then,  some  method  of  inducing  men 
to  work  for  others  with  the  same  intelligence,  skill  and  en- 
thusiasm as  they  work  for  themselves  is  highly  desirable 
and  absolutely  necessary  to  the  most  successful  operation 
of  any  business.  The  methods  in  actual  use  by  which  effi- 
ciency on  the  part  of  hired  employes  may  be  stimulated  are 
separated  into  two  principal  classes:  First,  those  which 
drive  men  to  do  their  work,  and  second,  those  which  hold 
out  some  reward  other  than  the  regular  wages  as  an  in- 
ducement to  more  efficient  work. 

1.  The  driving  method  demands  both  a  strong,  highly  cen- 
tralized, semi-military  organization  and  also  keen  competi- 
tion among  the  workingmen  for  positions  in  the  industrial 
army.  The  first  of  these  conditions  is  found  in  many  in- 
dustrial establishments  at  the  present  time.  The  higher 
officials  are  in  most  organizations  heavily  interested  in  the 
financial  success  of  the  enterprise  and  hence  have  every 
possible  incentive  to  maintain  an  efficient  organization  for 
the  purpose  of  driving  the  officials  directly  under  them  to 
secure  results.    To  this  end  each  department  head  is  made 


MODERN  BUSINESS  ORGANIZATION         203 

directly  responsible  to  the  central  authorities  and  the  work 
under  each  department  is  separated  into  divisions  under 
managers  directly  responsi])lo  to  the  do])artment  liead.  The 
division  managers  then  demand  results  fr(.)m  their  subor- 
dinates and  such  subordinates  in  turn  from  the  shop  fore- 
man, bosses,  and  other  men  directly  in  charge  of  the  work 
in  process.  Any  department  head  who  cannot  show  results 
is  pnmiptly  discharged  and  one  who  promises  to  show  great- 
er efficiency  is  given  his  position.  The  same  process  is 
carried  out  down  through  the  ranks  until  the  whole  or- 
ganization, from  the  highest  official  to  the  humblest  laborer, 
is  kept  at  concert  pitch. 

To  deteiTnine  the  relative  efficiency  of  each  department 
and  of  each  branch  of  the  various  departments,  elaborate 
cost  records  are  kept  and  by  comparison  of  such  accounts 
the  relative  efficiency  of  various  departments  and  conse- 
quently of  the  head  and  of  all  the  men  employed  in  a  depart- 
ment, is  determined. 

The  success  of  the  driving  method  is  dependent  upon 
the  ability  of  managers  to  discharge  officials  and  working- 
men  and  find  more  efficient  men  to  take  their  places.  The 
process  is  thus  dependent  upon  active  competition  among 
officials  and  men  for  the  positions  vacated  l)y  the  discharged 
employes.  Among  the  men  in  executive  positions  this  pro- 
cess has  ahvays  worked  effectively,  but  among  skilled  la- 
borers it  has  in  most  cases  ceased  to  have  its  former  im- 
portance. This  condition  is  the  direct  result  of  the  or- 
ganization of  laborers  into  unions  for  the  very  purjDose  of 
preventing  competition  among  themselves,  thus  preventing 
the  driving  process  from  working  effectively  wherever 
labor  unites  in  regular  organizations.  For  this  reason  the 
military  method  of  securing  efficiency  has  become  much  less 
effective  among  the  wage  class  than  among  the  higher 
officials,  and  it  has  been  found  advisable  in  many  cases  to 
supplement  it  by  various  plans  for  rewarding  the  more 
efficient  workmen. 


204  MAURICE  H.  ROBINSON 

2.  The  reward  method  of  securing  efficiency  has  sev- 
eral important  varieties,  all  with  a  common  purpose,  name- 
ly to  reward  men  working  on  a  salary,  or  at  wages,  in  pro- 
portion to  the  actual  value  of  the  products  which  they  turn 
out.  These  methods  may  be  divided  into  the  following 
classes:  The  piece  wage  system,  the  bonus  and  premium 
system,  the  profit  sharing  system,  the  pension  system,  and 
finally  the  system  of  offering  shares  in  o^^^lership  either  by 
giving  such  shares  outright  or  by  selling  them  to  employes 
at  less  than  the  market  price. 

The  Piece  Wage  System.  Tliis  system  has  obvious  ad- 
vantages for  the  purpose  of  securing  efficiency  in  certain 
kinds  of  work,  but  its  application  is  narrowly  limited.  Its 
first  effect  is  to  secure  an  increased  output  at  the  sacrifice 
of  quality,  and  thus  cause  the  price  of  the  article  manu- 
factured to  fall  rapidly,  first  because  the  quality  has  de- 
teriorated and  second  because  the  market  supply  is  increas- 
ing. To  check  the  first  tendency  the  management  is  obliged 
to  introduce  an  expensive  system  of  inspection  which  of  it- 
self prevents  the  workingman  from  getting  the  full  benefit 
of  his  increased  efficiency.  As  the  output  increases  vdth 
the  increase  of  efficiency,  the  number  of  laborers  must 
necessarily  be  reduced  and  the  price  of  the  article  lowered. 
In  the  first  case  the  piece  wages  fall  owing  to  the  increased 
competition  among  the  laborers,  and  in  the  second  case  the 
same  reduction  is  caused  by  the  lowering  of  the  selling 
price.  The  results  of  the  piece  wage  system  on  the  piece 
rate  are  so  well  known  that  its  effectiveness  in  stimulating 
efficiency  is  to  a  considerable  extent  neutralized.  More- 
over it  is  applicable  only  when  the  work  is  of  a  routine 
nature  and  where  the  test  for  quality  can  easily  and  ac- 
curately be  applied.  Hence  other  means  of  stimulating 
efficiency  must  be  sought  in  all  other  cases. 

A  modification  of  this  system,  called  the  differential 
piece  rate  system,  was  devised  and  put  in  operation  at  the 
JVIidvale  Steel  Works  about  twenty  years  ago,  by  Mr.  F.  W. 


MODERN  BUSINESS  ORGANIZATION         205 

Taylor.  The  differential  piece  rate  system  estahli.slied  a 
(loii])le  system  of  piece  rates  vai-yin^  with  the  output  for 
the  day — a  hif,di  rate  for  a  certain  delinite  large  output  and 
a  lower  rate  for  a  smaller  number  of  pieces.  This  plan  put 
a  still  larger  premium  upon  the  volume  of  production  ])ut 
was,  of  course,  open  to  all  of  the  objections  and  subject  to 
all  tlio  limitations  whicli  inhormtly  Ix'long  to  that  plan. 

The  Bonus  and  Premium  Systems.  The  bonus  system 
developed  out  of  the  piece  rate  system  and  was  devised  for 
the  purpose  of  securing  the  objects  which  the  other  systems 
of  wage  joa^Tnents  aimed  at  but  failed  to  accomplish.  Tt 
was  introduced  at  the  Bethlehem  Steel  Company  works  in 
1900,  lit  the  suggestion  of  Mr.  H.  L.  Gantt,  who  was  at  that 
time  working  with  Mr.  Taylor  for  the  purpose  of  increasing 
the  efficiency  of  labor.  Mr.  Taylor  had  been  occupied  in 
rearranging  the  main  machine  shop  to  facilitate  its  oper- 
ation by  placing  machines  of  the  same  character  together, 
thus  standardizing  the  work  and  simplifying  its  super- 
vision and  paving  the  way  for  the  differential  piece  rate 
system  which  at  that  time  was  considered  the  best  plan 
for  securing  a  large  output. 

While  waiting  for  conditions  under  whicli  the  differen- 
tial piece  rate  system  could  properly  be  introduced,  ^Ir. 
Gantt 's  plan  was  adopted.  It  consisted  in  giving  a  bonus 
of  fifty  cents  per  day  to  eacli  working  man  who  accom- 
plished in  that  time  all  the  work  that  his  instructions  called 
for.  To  secure  the  co-operation  of  the  gang  boss  and  the 
speed  boss,  the  superintendent  of  the  machine  shop,  Mr.  E. 
P.  Earle,  suggested  the  payment  to  each  of  these  officials  of 
an  additional  bonus  for  each  of  his  men  who  earned  a  bonus 
and  later  a  second  additional  bonus,  provided  all  the  men 
under  the  charge  of  any  one  of  the  bosses  succeeded  in  earn- 
ing bonuses.  After  two  months'  trial  the  assistant  super- 
intendent of  the  machine  shop  reported  as  follows:  "One 
of  the  best  results  ....  has  been  the  moral  effect 
Upon  the  men.    They  have  had  it  X)laced  in  their  X3ower  to 


206  MAURICE  H.  ROBINSON 

earn  a  very  substantial  increase  in  wages  by  a  correspond- 
ing increase  in  their  productive  capacity  and  this  has  given 
them  a  feeling  that  the  company  is  quite  willing  to  reward 
the  increased  effort.  .  .  .  The  percentage  of  errors  in 
machining  has  been  reduced.  .  .  .  The  condition  of  the 
machines  is  vastly  improved.  .  .  .  It  is  only  by  the 
introduction  of  the  bonus  plan  that  we  have  had  furnished 
an  automatic  incentive  for  men  to  work  up  to  their  capacity 
and  to  obtain  from  the  machines  the  product  which  they  are 
capable  of  turning  out.  It  has  lifted  the  hands  of  the  speed 
bosses  (foremen)  and  enabled  them  to  act  in  the  capacity 
for  which  these  positions  were  created — that  of  instruct- 
ors." 

The  bonus  plan  had  one  element  of  weakness  which  was 
soon  discovered  and  corrected.  This  weakness  arose  from 
the  fact  that  no  incentive  was  given  skilled  workmen  after 
they  had  earned  their  bonuses.  Consequently  after  some 
modification  a  plan  was  adopted  by  which  a  workman  was 
paid  for  the  time  allowed  plus  a  percentage  for  that  time. 
This  gave  an  incentive  for  the  best  men  to  do  as  much  work 
as  possible  while  assuring  the  slower  ones  of  a  minimum 
rate  per  day. 

The  premium  system  was  devised  by  Mr.  F.  A,  Halsey 
and  was  first  described  in  a  paper  read  before  the  American 
Society  of  Mechanical  Engineers,  in  1891.  The  basis  of 
this,  as  of  all  other  premium  systems,  is  a  fixed  standard 
time  for  standard  work,  with  a  regular  wage  for  the  same, 
established  as  a  result  of  actual  performance  by  various 
workmen.  The  employes  who  do  the  standard  work  in  less 
than  the  standard  time  are  given  a  premium  based  upon 
the  saving  of  time.  For  example,  the  Halsey  method  origi- 
nally allowed  the  workman  a  premium  of  one-half  the 
time  saved.  Hence  at  a  wage  of  30  cents  per  hour  and  a  day 
of  ten  hours,  the  workman  who  accomplished  his  standard 
work  in  eight  hours  received  $2.40  plus  one-half  of  sixty 
cents,  or  $2.70  a  rate  of  33.7  cents  per  hour  for  the  standard 


MODERN  BUSINESS  ORGANIZATION         207 

task.  A  modification  of  the  llalsey  plan  allows  the  work- 
man one-third  of  the  time  saved.  The  details  of  the  llalsey 
plan  are  showTi  in  the  following  table : 

The  Halsey  Method 
Workman  to  receive  one-half  of  time  saved.    Standard  time — 10  Hours. 


Hours 

Regular 

Earnings  at 

i  time 

Premium 

Total 

Earnings 

worked 

rate 

reg.  rate 

saved 

earned 

earnmgs 

per  hour 

10 

$0.30 

$3.00 

$3.00 

$0.30 

9 

.30 

2.70 

i  hour 

$0.15 

2.85 

.316 

8 

.30 

2.40 

1    hour 

.30 

2.70 

.337 

7 

.30 

2.10 

lA  hours 

.45 

2.55 

.364 

6 

.30 

1.80 

2    hours 

.60 

2.40 

.40 

5 

.30 

1.50 

2i  hour.s 

.75 

2.25 

.45 

4 

.30 

1.20 

3    hours 

.90 

2.10 

.525 

3 

.30 

.90 

3*  hours 

1.05 

1.95 

.65 

2 

.30 

.60 

4    hours 

1.20 

1.80 

.90 

1 

.30 

.30 

4i  hours 

1.35 

1.G5 

1.05 

The  Rowan  method  was  originally  proposed  by  Mr. 
James  Rowan  of  Glasgow,  Scotland,  in  1901.  This  makes 
the  premium  a  percentage  of  the  time  saved.  The  work- 
man is  given  the  same  percentage  of  the  regular  time  as  the 
time  saved  bears  to  the  time  allowed.  Thus  under  the  same 
conditions  as  stated  in  connection  with  the  Halsey  method, 
the  workman  who  saves  two  hours  receives  20  per  cent  of 
the  time  saved,  or  20  per  cent  of  $2.40,  or  $2.88  for  eight 
hours'  work,  which  is  a  rate  of  36  cents  per  hour.  The  de- 
tails of  the  Rowan  j^remium  plan  are  shown  in  the  following 
table : 

The  Rowan  Method 

Workman  to  receive  same  per  cent  of  regular  time  as  time  saved  bears  to 
time  allowed.     Standard  time — 10  Hours. 


%  of  Time 

Premium  on 

Earnings 

per 

Hour 

Hours 

Regular 

Earnings  at 

Time 

Saved  to 

Basis  of 

Total 

Worked 

Rate 

Reg.  Rate 

Saved 

Time 

Same  %  of 

Earninp^ 

Allowed 

Reg.  Time 

$3i)0~ 

10 

$0.30 

$3.00 

$0.30 

9 

.30 

2.70 

1  hr. 

107o 

$0.27 

2  97 

.33 

8 

.r'.o 

2.40 

2  hrs. 

20% 

.48 

2  '^8 

.36 

7 

.30 

2.10 

3  hrs. 

30% 

.63 

2.73 

.39 

6 

.30 

1.80 

4  hrs. 

40% 

.72 

2.52 

.42 

5 

.30 

1.50 

5  hrs. 

50% 

.75 

2.25 

.45 

4 

.30 

1.20 

6  hrs. 

60% 

.72 

1.92 

.48 

3 

.30 

.90 

7  hrs. 

70% 

.63 

1.53 

.51 

2 

.30 

.60 

8  hrs. 

80% 

.48 

1  08 

..'>4 

1 

.30 

.30 

9  hrs. 

90% 

.27 

..')7 

■■" 

208 


MAURICE  H.  ROBINSON 


A  third  modification  of  the  premium  plan  was  devised  by 
Mr.  Harrington  Emerson  and  adopted  by  the  Santa  Fe  Rail- 
road in  their  railroad  shoj^s.  The  Emerson  method  rates 
the  workman  who  aecomiDlishes  his  task  in  standard  time  at 
100  per  cent  efficiency,  and  begins  to  award  a  premium 
whenever  the  workman  exceeds  66  2-3  per  cent  efficiency. 
The  premium  increases  gradually  until  the  standard  time 
of  100  per  cent  efficiency  is  reached,  at  which  point  it  is 
twenty  per  cent  of  the  wages.  After  100  per  cent  efficiency 
is  reached  the  premium  increases  at  the  rate  of  one  per  cent 
for  every  one  per  cent  of  increase  in  efficiency.  The  details 
of  the  Emerson  plan  are  shown  in  the  following  table: 


The  Santa  Fe,  or  Emerson  Method 

Standard  Time — 6  Hours  40  Minutes. 


Hours 

Regular 

Earnings  at 

Efficienc) 

Premium 

Total 

Earnings 

Worked 

Rate 

Reg.  Rate 

Per  Cent 

Earned 

Earnings 

per  Hour 

10 

$0.30 

$3.00 

677o 

• .  .  • 

$3.00 

$0.30 

9 

.30 

2.70 

74% 

$0.03 

2.73 

.303 

8 

.30 

2.40 

83% 

.12 

2.52 

.315 

7 

.30 

2.10 

95% 

.31 

2.41 

.344 

6 

.30 

1.80 

111% 

.56 

2.36 

.393 

5 

.30 

1.50 

133% 

.80 

2.30 

.46 

4 

.30 

1.20 

167% 

1.04 

2.24 

.56 

3 

.30 

.90 

222% 

1.28 

2.18 

.726 

2 

.30 

.60 

333% 

1.52 

2.12 

1.06 

1 

.30 

.30 

667% 

1.76 

2.06 

2.06 

The  premium  plans  described  above  have  been  modified 
by  adding  other  features  or  combining  the  features  of  two 
or  more  into  one.  The  Cardullo  method  fixes  a  maximum 
rate  beyond  which  a  premium  cannot  be  earned.  Some- 
times the  Halsey  method  is  combined  with  the  Rowan 
method  and  still  other  combinations  are  sometimes  adopted. 
All  of  the  various  modifications  of  the  original  premium 
plans  seem  to  have  been  devised  to  prevent  the  most  skilled 
workmen  from  receiving  the  full  benefits  of  the  premium 
system.  They  differ  chiefly  in  one  point,  namely,  the  rate 
at  which  the  wage  payment  per  hour  increases  with  the  in- 
crease of  efficiency. 


MODERN  BUSINESS  ORGANIZATION         209 

The  preniium  ])laii  usually  includes  a  bonus  to  the  sup- 
erintendents and  t'orenieu  bascnl  upon  the  elheieney  attained 
by  the  workmen  directly  under  their  charge.  In  this  re- 
spect it  follows  the  Gantt  bonus  system  as  described  above. 
The  premium  plan  of  wage  paj-ment  is  based  upon  two 
sound  business  pi-inciples:  First,  that  the  employe  work- 
ing either  on  a  salary  or  for  wages  is  entitled  to  l)e  paid  in 
proportion  to  the  work  done  rather  than  on  the  basis  of  the 
time  consumed;  second,  that  a  company  can  afford  to  pay 
for  the  saving  of  time  owing  to  the  consequent  reduction 
in  that  part  of  the  cost  of  production  due  to  a  better  utiliza- 
tion of  the  plant  and  machinery.  Its  extended  use  is,  how- 
ever, limited  seriously  by  the  following  circumstances,  any 
or  all  of  which  may  prevent  its  adoption  in  particular 
cases: 

First,  in  certain  kinds  of  work  it  is  impossible  to  fix  a 
standard  task  as  a  day's  work. 

Second,  the  imions  are  generally  opposed  to  the  plan 
since  it  is  contrary  to  one  of  the  principles  of  unionism, 
namely,  equal  rates  per  day  for  work  of  the  same  char- 
acter. 

Third,  the  cost  and  difficulties  inherent  in  its  administra- 
tion. 

The  first  two  points  need  little  discussion.  It  is  evident 
that  it  is  practicable  to  devise  a  standard  task  only  when 
the  work  is  of  a  routine  character.  For  example,  while 
spinning  and  weaving  would  afford  an  excellent  field  for 
its  adojDtion,  it  would  be  manifestly  impracticable  in  all 
kinds  of  repair  work,  in  all  special  work,  and  in  all  cases 
where  the  work  of  employes  is  dependent  upon  others  over 
which  they  have  no  control.  In  the  second  place,  the  prin- 
ciples being  directly  contrary  to  the  ideals  of  trade  union- 
ism, it  is  likely  to  cause  labor  troubles  and  strikes  wherever 
unionism  is  at  all  strong.  In  the  third  i)lace,  the  premium 
plan  is  dependent  upon  an  elaborate  organization  and  a 
management  of  the  highest  efficiency.  And  even  where  these 

B.II— 14 


210  MAURICE  H.  ROBINSON 

features  are  found  its  practical  operation  and  permanent 
success  requires  an  accounting  sj^stem  able  to  administer  its 
details  fairly  and  accurately,  so  fairly  that  the  various  em- 
ployes may  not  feel  that  they  are  being  cheated  out  of  their 
rights,  and  so  inexpensive  that  the  company  may  receive 
some  additional  profits  after  its  cost  of  administration  is  de- 
ducted from  the  total  profits  accruing  from  the  increased 
efficiency  of  the  plant,  machinery  and  workmen. 

In  certain  cases,  for  example,  in  the  Midvale  and  Bethle- 
hem steel  works,  and  in  the  Santa  Fe  railroad  shops,  etc., 
the  premimn  plan  has,  notwithstanding  serious  labor 
troubles,  been  exceedingly  successful.  In  other  cases,  ow- 
ing partly  to  circumstances  not  necessarily  connected  with 
the  system,  it  has  proved  a  complete  failure.  Its  adoption, 
then,  must  be  considered  in  the  light  of  the  special  circum- 
stances which  surround  each  company,  and  whenever  the 
conditions  are  right,  it  is  sure  to  prove  successful  by  in- 
creasing the  efficiency  of  labor  and  in  that  way  of  the  com- 
pany as  a  whole. 

Profit  Sharing.  Under  the  premium  plan  the  workman 
receives  an  addition  to  his  wages  whenever  he  increases  his 
own  efficiency.  In  profit  sharing,  on  the  contrary,  any  ad- 
dition to  his  wages  is  dependent  upon  the  business  efficiency 
of  the  whole  enterprise.  It  is,  of  course,  entirely  practic- 
able to  combine  these  two  systems,  in  which  case  it  might 
result  that  the  individual  workman  would  be  receiving 
premiums  for  his  own  efficiency  while  the  company  was  be- 
coming bankrupt  on  account  of  its  own  inefficiency.  On  the 
other  hand,  there  would  be  other  cases  in  which,  while  none 
of  the  workmen  earned  a  premium  for  efficient  service,  the 
company  might  be  making  large  profits. 

Profit  sharing,  unlike  the  premium  system,  is  capable 
of  universal  adoption.  Its  acceptance  is  dependent  upon 
the  willingness  of  employers  to  put  it  in  force  and  of  the 
employes  to  accept  its  provisions.  It  has  therefore  been  de- 
fined as  "A  voluntary  agreement  by  virtue  of  which  an  em- 


MODERN  BUSINESS  ORGANIZATION         211 

ploye  receives  a  share  fixed  beforehand  in  the  profits"  of 
the  enterprise  by  wliich  he  is  employed. 

Profit  sharing  was  introduced  into  England  as  early  as 
1832  and  in  France  ten  years  later.  Notwithstanding  its 
early  adoption,  its  practical  success,  measured  by  its  actual 
use,  has  been  disappointing.  In  England  where  the  system 
has  been  most  extensively  used,  it  is  estimated  that  less 
than  100,000  workmen  are  enjoying  its  benefits  at  the  pres- 
ent time.  In  the  United  States  this  method  has  made  little 
progress,  although  in  some  cases  it  has  met  with  remark- 
able success,  viewed  from  the  standpoint  of  the  employer 
as  well  as  that  of  the  employe. 

The  causes  of  this  condition  are  worthy  of  consideration 
from  the  viewpoint  of  business  efficiency.  It  was  originally 
thought  that  profit  sharing  would  enlist  the  employe  on 
the  side  of  the  capitalist  and  employer  by  giving  him  a 
share  in  the  increased  business  efficiency  due  to  his  co- 
operation. A  new  source  of  i3rofits  would  thus  be  opened 
up  which,  being  created  by  the  laborers,  should  be  shared 
by  them.  Such  profits  would  arise  from  a  reduction  in  the 
waste  of  materials,  improved  quality  of  the  work,  less  ex- 
pense in  supervision,  the  avoidance  of  la])or  troubles,  great- 
er permanence  of  service,  and  suggestions  from  the  em- 
ployes in  regard  to  improvements  likely  to  reduce  the  cost 
and  improve  the  products.  Notwithstanding  its  theoretical 
advantages,  it  will  be  noticed  that  it  is  obviously  impossi- 
ble to  segregate  the  profits  caused  by  the  introduction  of 
profit  sharing  from  those  earned  by  the  efficiency  of  the 
general  management.  Moreover,  workmen  usually  have 
no  method  of  determining  what  the  real  profits  of  an  en- 
terprise in  any  one  year  have  been.  They  are  therefore 
likely  to  assume  that  the  system  is  being  used  to  defraud 
them  by  inducing  them  to  work  harder  without  corre- 
spondingly increasing  their  wages.  Furthermore,  almost 
every  enterprise  occasionally  experiences  an  iniprofitable 
year,  and  this  unfortmiate  condition  is  more  likely  to  re- 


212  MAURICE  H.  ROBINSON 

suit  from  inefficiency  in  the  management  than  from  inef- 
ficiency on  the  part  of  labor.  Hence,  whenever  bad  years 
do  come  the  profit  sharing  plan  is  likely  to  be  broken  np. 
And  finally,  the  introduction  of  the  piece  rate  system  and 
the  bonus  and  premium  plans  have  given  workmen  in  many 
industries  an  opportunity  to  profit  more  directly  from  their 
own  increased  efficiency  than  any  system  of  profit  sharing 
is  able  to  provide.  In  some  cases  the  profit  sharing  plan 
has  been  conducted  on  the  Santa  Claus  system,  the  employ- 
er making  his  employes  a  present  at  the  end  of  each  year, 
the  amount  of  such  distribution  being  entirely  dependent 
upon  his  own  individual  wishes  in  the  matter.  This  plan 
of  conducting  the  profit  sharing  method  is,  of  course,  ob- 
jected to  by  selfrespecting  workmen  on  the  ground  that  it 
is  paternalistic  in  its  nature  and  that  it  is  likely  to  be  used 
for  the  purpose  of  depressing  the  general  scale  of  wages. 

The  profit  sharing  principle  was  adopted  by  Mr.  Smith 
in  connection  with  the  new  Trades  Combination  Movement 
as  the  most  feasible  plan  for  securing  the  co-operation  of 
the  labor  unions  and  the  consolidations  of  which  he  was 
the  originator.  Briefly  the  Smith's  alliance  plan  is  as  fol- 
lows :  A  combination  of  all  of  the  employers  in  a  given  in- 
dustry is  formed,  similar  to  the  German  kartels.  Then 
the  local  unions  formed  in  each  one  of  the  various  plants 
are  joined  in  a  central  organization  which  unites  all  the 
labor  unions  within  the  industry  into  a  federal  union.  A 
combination  is  then  effected  between  the  federation  of  la- 
bor unions  and  the  combination  of  employers.  The  work- 
men are  guaranteed  standard  wages  in  addition  to  a  share 
in  the  profits  which  result  from  the  combination  of  both 
employers  and  laborers,  the  percentage  of  such  profits  be- 
ing determined  by  the  labor  cost  of  the  articles  which  are 
produced  by  the  several  manufacturing  companies.  In 
this  case  the  profit  sharing  plan  is  certain  not  only  to  give 
the  workman  a  portion  of  the  profits  resulting  from  a  mo- 
nopolistic combination,  but  at  the  same  time  tends  to  per- 


MODERN  BUSINESS  ORGANIZATION         213 

petuatc  such  iii()iio})oly  hy  keeping  the  workmen  interested 
in  its  i'ntiiro  development. 

Participation  in  Ownership.  Under  the  corporation 
system  of  conducting  business  enterprises  any  employe 
who  is  able  and  willing  to  save  a  portion  of  his  wages  can 
usually  i)urehase  stock  in  the  company  by  which  he  is  em- 
ployed and  thus  share  in  the  profits  of  the  enterprise.  This 
method,  however,  gives  him  profits  as  a  capitalist  rather 
than  as  a  workman.  Hence,  whenever  a  company  desires 
to  stimulate  efficiency  on  the  pai-t  of  its  employes,  some 
other  method  of  bestowing  an  interest  in  the  business  up- 
on those  considered  especially  worthy  must  be  devised.  In 
the  individual  proprietorship  and  the  partnership  this 
method  has  been  practiced  from  the  earliest  times  with  de- 
cided success.  The  individual  proprietor  sooner  or  later 
finds  some  especially  trustworthy  employe  whom  he  oft'ei^ 
a  share  in  the  business.  The  partnership  then  formed  ex- 
pands by  adding  others  to  the  favored  circle.  This  method 
was  used  by  Andrew  Carnegie  in  the  earlier  days  of  the 
steel  industry  to  promote  efficiency  among  his  superintend- 
ents and  managers,  and  a  considerable  number  of  the 
leaders  in  that  field  owe  their  opportunities  largely  to  the 
use  of  this  principle.  AMien  the  Carnegie  company  was 
converted  from  a  partnership  to  a  corporation  it  was  stated 
that  the  partnership  foi-m  had  been  retained  longer  than 
would  otherwise  have  been  the  case  in  order  to  make  use 
of  this  system.  It  was  further  stated  that  after  the  forma- 
tion of  the  corporation  means  had  been  found  for  continu- 
ing the  same  general  method  of  rewarding  the  most  effi- 
cient officials  of  the  company. 

It  is,  of  course,  plain  that  under  tlie  corporation  form 
of  organization  for  an  operating  business  the  process  of 
awarding  stock  to  employes  for  faithful  and  efficient  serv- 
ice is  subject  to  certain  difficulties  which  do  not  occur  with 
the  individual  proprietor  and  the  partnership.  As  stated 
in  a  previous  section,  the  laws  of  the  various  states  require 


214  MAURICE  H.  ROBINSON 

that  stock  shall  be  issued  only  for  an  equivalent  in  cash, 
property  or  service.  When  stock  is  transferred  to  em- 
ployes it  must  be  for  services,  and  if  the  employe  is  to  re- 
ceive any  benefit  over  what  might  have  been  obtained  by 
receiving  his  wages  in  cash,  he  must  be  overpaid  for  his 
services  or,  what  is  the  same  thing,  he  must  be  awarded 
his  stock  at  less  than  the  actual  value.  This  makes  it  ex- 
ceedingly difficult  to  arrange  any  plan  satisfactory  to  the 
company  and  to  the  employes  which  is  not  at  the  same 
time  contrary  to  public  law.  The  plan  adopted  by  the 
Steel  Corporation  is  perhaps  the  best  known  of  all  such 
projects.    The  plan  in  brief  is  as  follows: 

*' Every  workman  employed  by  the  Steel  Corporation 
can  buy  a  limited  number  of  shares  of  the 'corporation's 
stock  at  a  price  that  is  now  approximately  the  market 
price — the  least  well  paid  employes  having  the  precedence 
both  in  the  receiving  of  stock  and  in  the  proportionate 
number  of  shares  they  can  buy.  They  can  pay  for  the 
stock  out  of  their  salaries  at  any  time  within  three  years, 
in  the  meantime  receiving  a  seven  per  cent  dividend  on 
the  total  amount  to  be  invested  and  paying  five  per  cent 
interest  on  the  deferred  payments.  If  the  employe  dis- 
continue his  payments  before  the  stock  becomes  his,  he 
can  get  back  the  money  he  has  paid  in  and  he  may  keep 
the  difference  between  the  dividend  on  the  whole  and  the 
interest  on  the  unpaid  part.  If  he  keeps  the  stock  after 
he  has  paid  for  it,  and  remains  an  employe  of  the  company 
for  five  years,  he  receives  another  payment  as  an  additional 
dividend  of  five  dollars  a  year  for  each  share.  If  during 
the  five  years  he  leaves  the  company  this  additional  bonus 
is  paid  into  a  fund  which  is  divided  among  the  employe 
stockholders  who  have  remained  with  the  company.  A 
man  who  is  seriously  disabled,  or  the  estate  of  a  man  who 
dies  while  in  the  service,  receives  the  bonus  for  the  years 
during  which  he  worked." 

This  plan  it  will  be  observed  is  at  the  best  only  a  partial 


MODERN  BUSINESS  ORGANIZATION         215 

substitute  for  the  method  so  successfully  used  by  Carnegie 
up  to  the  time  of  the  union  of  the  Taniec^ie  Company  with 
its  leading  competitors,  in  1901.  It  is  undoubtedly  attrac- 
tive to  the  higher  salaried  officials,  but  it  cannot  in  any 
way  be  considered  as  a  substitute  for  the  premium  plan 
of  stinmlating  efficiency  among  the  rank  and  file  of  the 
workmen.  The  Steel  Corporation  apparently  realized  this 
defect  and  as  early  as  1905  established  a  bonus  fund  for 
the  purpose  of  rewarding  meritorious  workmen  by  the  dis- 
tribution of  cash  or  stock  quite  independent  of  the  sale  of 
prefeiTed  stock.  In  addition  to  the  cash  bonuses,  the  com- 
pany has  regularly  awarded  a  small  amount  of  common 
stock,  $21,000  during  one  year,  as  a  special  reward  for  ef- 
ficient service. 

Pension  Systems.  While  it  is  obviously  impossible  in  a 
work  on  business  organization  to  describe  at  length  the  de- 
tails of  the  various  systems  by  which  pensions  for  tem- 
porary or  permanent  disability  are  aw^arded,  it  is  proper 
to  call  attention  to  this  method  of  stimulating  efficiency. 
Whether  the  pension  fund  is  contributed  jointly  by  the 
company  and  the  employes,  as  in  the  case  of  the  Pennsyl- 
vania Railroad  Company,  or  by  the  corporation  alone,  the 
pension  system  is  from  the  point  of  view  here  presented  a 
reward  for  continuous  efficiency  through  a  period  of  years. 
In  this  respect  it  is  to  be  contrasted  with  the  bonus  and 
premium  systems,  both  of  which  are  rewards  for  temporary 
efficiency  rather  than  for  permanent  and  continuous  serv- 
ice. The  two  plans  thus  supplement  each  other  and  neith- 
er may  be  neglected  by  an  enterprise  that  hopes  to  main- 
tain a  high  standard  of  efficiency  among  its  employes. 

The  Problem  of  Prices. 

A  business  enterprise  manufactures  or  purchases  goods 
to  sell  again  at  the  highest  price  consistent  with  pennanent 
success.  From  the  price  obtained  must  be  paid  the  interest 
on  the  investment,  the  cost  of  material,  and  the  wages  of 


216  MAURICE  H.  ROBINSON 

labor.  If  the  gross  amount  received  from  sales  exceeds  the 
smn  of  these  various  items,  the  business  shows  real  profits; 
if  less,  it  shows  a  real  loss.  Efficient  management,  then,  in 
addition  to  the  work  already  discussed,  nameh^  wise  in- 
vestment and  efficient  operation,  has  a  third  problem  to 
solve — the  problem  of  fixing  prices. 

It  is  evident  that  the  price  may  be  made  under  two  very 
different  conditions:  First,  in  competition  with  rival  es- 
tablishments, and  second,  without  such  competition. 

1.  When  goods  are  sold  in  direct  competition  ^^ith 
other  business  establishments  a  maximum  price  is  fixed 
quite  independent  of  the  management.  It  is  of  course  pos- 
sible to  cut  iDrices  established  by  competitive  conditions 
and  whenever  this  is  done,  the  extent  of  the  cut  is  entirely 
within  the  control  of  the  management.  An  efficient  man- 
agement will  not,  however,  in  any  case  cut  the  price  be- 
low the  cost  of  iDroduction  except  as  a  temporary  expedient. 
It  is,  therefore,  desirable  for  every  business  enterprise  to 
know  the  cost  of  production  for  each  and  every  class  of 
goods  manufactured  or  sold.  This  can  be  determined,  pro- 
^aded  the  business  has  been  organized  in  a  systematic  way 
as  described  in  a  previous  section  and  an  efficient  ac- 
counting department  is  maintained.  Most  manufacturers 
while  able  to  state  whether  they  have  made  a  profit  from 
the  business  as  a  whole  in  any  year,  are  in  most  cases  not 
in  a  position  to  say  just  what  it  costs  to  manufacture  and 
seU  any  one  of  the  various  articles  which  they  produce. 
Consequently  when  they  find  a  competitor  cutting  prices 
for  the  purpose  of  enlarging  his  sales,  a  disastrous  price 
war  is  precipitated.  If  each  of  the  rival  manufacturers 
knew  the  exact  cost  of  producing  the  goods,  he  would  hesi- 
tate long  before  offering  one  dollar's  worth  of  a  manufac- 
tured product  for  seventy-five  cents  in  money.  Thus  sta- 
bility of  prices  would  be  maintained,  industrial  develop- 
ment would  proceed  at  an  even  pace,  and  one  of  the  funda- 
mental causes  of  our  periodical  panics  would  be  eliminated. 


MODERN  BUSINESS  ORGANIZATION         217 

The  cutting  of  prices  to  work  off  unseasonable  or  out- 
of-date  cfoods  is  of  course  quite  a  different  matter.  Here, 
for  sonic  reason,  the  manufactured  prodnct  has  lost  a  part 
of  its  noi-nial  vahie  and  nnist  l)e  disposed  of  at  the  best 
possi])le  price  to  avoid  further  or  greater  loss.  Such  con- 
tingencies, however,  are  usually  caused  by  low  efficiency 
on  the  part  of  those  who  conduct  the  character  and 
quantity  of  the  output,  and  the  management  should 
take  warning  and  see  that  this  serious  business  error  is 
not  repeated. 

When  the  regular  competitive  price  is  fixed  outside  of 
and  independent  of  the  control  of  the  management,  the 
problem  of  the  sales  department  consists  in  finding  the 
market  and  disposing  of  the  goods  in  the  most  economical 
manner.  Since  the  price  cannot  be  put  above  the  competi- 
tive level  of  prices,  but  may  be  maintained  there  by  efficient 
salesmanship,  every  penny  saved  in  the  cost  of  marketing 
accrues  to  the  company.  To  maintain  the  price  at  the 
present  level,  however,  the  manufacturer  of  a  particular 
class  of  goods  may  not  increase  the  output  beyond  the 
natural  growth  of  population  and  the  increase  of  purchas- 
ing power  that  comes  from  increased  wealth. 

The  price  policy  in  a  competitive  industry  is  thus  in- 
extricably involved  in  the  problem  of  production.  On  this 
account  the  Fall  River  cotton  mills  shut  down  by  concert- 
ed action  whenever  the  stock  increases  at  too  rapid  a  rate. 
Their  only  alteraative  would  be  a  reduction  in  price,  a 
lower  rate  of  profits  and,  if  this  process  w^ere  continued, 
bankruptcy  for  all  of  the  inefficient  mills. 

2.  AMien  a  company  controls  the  production  of  an  ex- 
clusive product  for  which  there  is  no  effective  substitute, 
the  price  policy  becomes  of  equal  importance  to  that  of 
investment  or  operation.  In  this  case  the  managers  may 
fix  the  price,  and  limit  the  production  to  the  amount  the 
market  will  take;  or  they  limit  the  output  and  let  the  price 
take  care  of  itself.    The  result  is  the  same  in  either  case. 


218 


MAURICE  H.  ROBINSON 


It  is  of  course  proper  to  say  that  a  monopolistic  producer 
may  fix  any  price  he  pleases.  This  is  quite  true,  but  it  is 
equally  true  to  say  that  the  purchaser  of  monopolistic 
goods  may  buy  any  quantity  that  he  thinks  best.  The 
higher  the  monopolist  fixes  the  price,  the  less  he  can  sell. 
The  first  problem,  then,  is  to  find  that  price  at  which  the 
profits  of  the  enterprise  are  the  largest  possible.  The  condi- 
tions under  which  a  monopolist  fixes  his  price  are  best  il- 
lustrated by  a  table  showing  prices 'per  unit,  the  number 
of  sales,  and  the  earnings  and  expenses  connected  with 
the  same.  The  following  table  shows  these  various  items 
and  under  these  conditions  it  is  evident  that  if  the  mo- 
nopolist makes  his  price  six  cents  per  unit  it  gives  him  the 
best  possible  results. 


Price 

Number 

Total 

Variable 

Total 

Fixed 

Total 

Net 

per 

Expenses 

Variable 

Expen- 

Expen- 

Revenue 

unit 

Sales 

Earnings 

per  unit 

Expen- 
ses 

ses 

ses 

$0.10 

600,000 

$  60,000 

$0.03 

$  18,000 

$50,000 

$  68,000 

— $  8,000 

.09 

800,000 

72,000 

.03 

24,000 

50,000 

74,000 

—     2,000 

.08 

1,200,000 

96,000 

.03 

36,000 

50,000 

86,000 

■f   10,000 

.07 

1,800,000 

126,000 

.03 

54,000 

50,000 

104,000 

f   22,000 

.06 

2,500,000 

150,000 

.03 

75,000 

50,000 

125,000 

-1-   25,000 

.05 

3,500,000 

175,000 

.03 

105,000 

50,000 

155,000 

-f   20,000 

.04 

.5,500,000 

220,000 

.03 

165,000 

50,000 

215,000 

-f      5,000 

Having  found  the  proper  price  the  monopolist  may 
maintain  it  only  so  long  as  he  restricts  his  output.  His 
profits  then  must  be  invested  in  other  lines.  If  he  can  dis- 
cover other  fields  where  he  can  establish  other  monopolies, 
well  and  good.  If  not,  he  faces  the  following  conditions: 
Either  he  must  invest  in  a  competitive  industry  Avhere 
profits  are  already  low,  or  reinvest  in  his  own  monopolis- 
tic industry  causing  the  price  and  profits  to  fall,  or  spend 
his  surplus  gains  in  extravagant  living. 

When  a  monopolistic  producer  distributes  his  own 
goods  to  the  final  consumer,  he  is  ordinarily  able  to  main- 
tain the  price  in  certain  localities  and  to  certain  individuals 
somewhat  above  the  price  he  receives  in  other  localities 


MODERN  BUSINESS  ORGANIZATION         219 

and  from  other  individuals.  In  such  cases  the  fixing  of 
the  price  is  even  more  com])licated  since  special  conditions 
nuist  be  considered  in  each  case.  If  <]^oods  grow  stale  on 
his  hands,  or  out  of  date,  the  monopolist  "will  be  forced  to 
sell  his  product  at  less  than  the  cost  of  production,  the  same 
as  any  other  producer. 

The  Problem  of  Management. 

The  problem  of  the  management  is,  then,  to  secure  and 
maintain  the  highest  possible  degree  of  business  efficiency, 
a  task  which  comprises  the  following  separate  and  distinct 
functions : 

1.  Finding  the  opportunity  to  produce  materials,  man- 
ufacture goods  and  perfoim  services  which  society  es- 
pecially needs. 

2.  Determining  the  location,  character,  arrangement 
and  equiiDment  of  the  business  establishment. 

3.  Finding  the  necessary  capital  for  the  construction 
and  maintenance  of  the  plants. 

4.  Operating  such  establishments  at  the  least  possi))le 
cost. 

5.  Selling  the  products  at  the  highest  price  consistent 
with  the  permanent  development  of  the  enterprise. 

Each  of  these  functions  demands  a  somewhat  different 
kind  of  training  and  exjoerience  and  hence  a  group  of 
specialists  has  been  developed  in  each  field  to  whom  the 
work  is  ordinarily  entrusted  and  the  general  management 
then  organizes  the  business  into  its  natural  departments 
and  co-ordinates  and  directs  the  operation  of  all  from  the 
viewpoint  of  the  business  enterprise  as  a  whole.  The  man- 
agement then  must  not  only  be  in  direct  communication 
with  all  the  departments,  but  in  addition  must  have  ac- 
curate and  periodic  tests  of  the  efficiency  with  which  each 
is  being  conducted.  In  the  smaller  business  enterprises 
the  proprietor  not  only  acts  as  manager  for  the  whole  busi- 
ness, but  often  as  promoter,  engineer,  financier,  superin- 


220  MAURICE  H.  ROBINSON 

tendent,  salesman,  and  finally  tests  tlie  efficiency  of  the 
various  operations  through  the  practical,  if  not  entirely 
scientific,  method  of  drawing  the  surplus  profits. 

In  the  larger  enterprises,  whether  owned  by  one  or 
many,  the  operations  become  too  complex  and  extensive 
to  be  tested  by  the  simpler  methods  of  the  smaller  estab- 
lishments. For  this  purpose  a  complete  and  comprehen- 
sive accounting  department  must  be  maintained.  As  al- 
ready observed  in  the  section  describing  the  organization 
and  working  of  an  accounting  department,  this  science 
has  a  double  task  to  perform: 

1.  To  show  the  economic  relationships  of  the  various 
persons  having  credit  relations  with  the  business.  These 
purchasers  are  charged  with  the  goods  bought  on  account 
and  credited  with  payments.  The  laborers  are  credited 
with  their  services,  and  charged  when  paid  their  weekly 
or  monthly  wages.  Subscribers  to  the  capital  stock  are 
charged  for  their  subscriptions  and  credited  with  pay- 
ments which  they  make  on  that  account.  The  sharehold- 
ers are  credited  with  their  proper  proportion  when  divi- 
dends are  declared  and  charged  when  such  dividends  are 
paid.  In  this  way  a  complete  record  is  kept  of  all  credit 
transactions  which  protects  the  rights  of  both  parties  in 
the  transactions.  Where  books  are  kept  simply  for  this 
purpose,  no  account  need  be  taken  of  cash  transactions, 
although  whenever  any  one  except  the  proprietor  handles 
money  a  cash  book  is  kept  for  the  purpose  of  detecting 
theft  and  carelessness.  Where  all  the  transactions  are  in 
cash,  bookkeeping  of  this  character  may  be  entirely  dis- 
pensed with. 

2.  To  test  the  efficiency  of  the  business  as  a  whole,  and 
where  there  are  several  departments,  as  is  usually  the  case, 
the  efficiency  of  each  department.  With  the  development 
of  large  business  enterprises  usually  carrying  on  many 
kinds  of  work,  the  second  function  of  the  accounting  de- 


MODERN  BUSINESS  ORGANIZATION         221 

paHment  is  of  equal  if  uot  greater  importauce  tliau  the 

tirst. 

The  Tests  of  Efficiency. 

The  simplest  method  of  testing  efficiency  in  a  business 
estahlishnunit  is  to  draw  up  a  balance  sheet  at  the  beginning 
of  the  period  and  another  at  its  end,  and  by  a  comparison 
of  the  two  statements  the  efficiency  of  the  business  will  be 
shown.  To  illustrate  this  method  we  shall  assume  that  the 
Illinois  Automo])ile  Corporation  has  been  in  operation  for 
one  year  and  that  a  balance  sheet  properly  drawn  up  shows 
the  following  conditions: 

ILLINOIS  AUTOMOBILE  CORPORATION. 

Balance  Sheet  at  the  End  of  the  Fl^^t  Year. 


Assets.  Liabilities. 

$  250,000      Capital    stock    

....$    750.000  Accounts   and    bills   pay 

Less  5% 37,500  712,500     Accrued    wages    50,000 


Land     $   250,000      Capital    stock    $5,000,000 

Buildings    $    750.000  Accounts   and    bills   payable,      500,000 


Equipment     $1,000,000  Earnings  for  the  year 1,112,500 

Less  I07o 100.000     900,000 


Materials     2,200,000 

Accounts    and    bills     receiv- 
able           600,000 

Cash    2,000,000 


$6,662,500  $6.f)62..')no 


At  the  l)eginning  of  the  year  $5,000,000  was  raised  by 
subscrij^ttion  and  the  capital  stock  was  invested  in  a  model 
plant.  The  necessary  equipment  and  sufficient  materials 
to  conduct  the  business  of  manufacturing  automobiles  effi- 
ciently were  purchased,  and  the  remainder  of  the  subscrip- 
tions was  kept  in  the  treasury  in  the  form  of  cash.  At  the 
end  of  the  year  it  is  found  that  allowing  the  usual  depre- 
ciation on  plant  and  machinery,  the  assets  have  increased 
to  $6,G62,500,  while  the  liabilities  amount  to  $5,550,000. 
The  difference  between  these  sums,  $1,112,500,  is  the  earn- 
ings for  the  year  resulting  from  the  manufaetui-e  and  sale 
of  automobiles.    As  $5,000,000  was  invested,  the  earning^i 


222  MAURICE  H.  ROBINSON 

give  a  return  for  the  year  of  22.6  per  cent  upon  the  invest- 
ment. 

A  more  elaborate  method  of  testing  the  efficiency  of  a 
business  enterprise  consists  in  keeping  an  account  of  all 
materials  used,  all  wages  paid,  interest  on  the  investment 
and  the  gross  amount  received  from  sales.  If  the  efficiency 
of  a  business  as  a  v/hole  only  is  to  be  tested,  the  foregoing 
will  be  sufficient  and  the  items  properly  arranged  will  form 
an  income  account  for  the  year.  This  is  shown  in  the  fol- 
lowing income  account : 

ILLINOIS  AUTOMOBILE  CORPORATION. 

Income  Account  for  the  First  Year. 

Net  cost  of  materials    $4,000,000       Sales,    4,000    cars    @    $2,000 

Interest    on    investment    ...      250,000  each     $8,000,000 

Depreciation     137,500 

Wages    2,500,000 

Earnings    1,112,500 

$8,000,000  $8,000,000 

In  this  statement  no  attempt  is  made  to  classify  the 
expenses  except  in  a  most  general  way  since  the  sole  ob- 
ject in  view  is  to  test  the  efficiency  of  the  corporation  as  a 
working  whole.  Here  it  is  shown  that  the  net  receipts 
from  the  sales  exceeds  the  gross  cost  of  producing  the  auto- 
mobiles by  $1,112,500,  and  consequently  the  net  earnings 
for  the  year  are  thus  determined.  It  will  be  further  no- 
ticed that  if  all  the  costs  were  consolidated  into  one  sum, 
namely,  $6,887,500,  the  efficiency  of  the  management  would 
be  shown  equally  well.  By  subdividing  the  expenses  into 
their  several  natural  divisions,  the  proportion  of  the  total 
costs  resulting  from  the  operation  of  the  several  depart- 
ments in  the  enterprise  may  be  calculated,  and  by  compar- 
ing these  sums  the  relative  efficiency  of  each  department 
may  be  determined.  In  reaching  conclusions  two  methods 
may  be  followed:  First,  comparing  the  several  classes  of 
costs  from  year  to  year  in  the  same  plant,  and  second,  com- 
paring the  several  classes  of  costs  in  different  plants  in 


MODERN  BUSINESS  ORGANIZATIOiS         223 

the  same  year.  In  all  cases,  however,  the  expenses  con- 
nected with  each  of  the  several  departments  must  ))e  segre- 
gated and  charged  against  the  appropriate  department. 
In  this  case  both  a  balance  sheet  and  an  income  account  is 
necessary — the  balance  sheet  to  show  the  extent  to  which 
the  fixed  capital  assists  in  each  of  the  separate  classes  of 
operations,  and  the  income  account  to  show  the  contribu- 
tions of  the  managerial  and  labor  elements  in  producing 
corresponding  classes  of  goods. 

How  Accounting  Assists  the  Management. 

To  discover  the  cause  of  efficiency  and  inefficiency  in  busi- 
ness management  a  complete  record  of  all  transactions  must 
be  kept  and  arranged  periodically  in  accordance  with  well- 
known  principles  of  modem  cost  accounting.  The  corpora- 
tion which  we  have  been  using  for  illustrative  purposes 
makes  the  problem  as  simple  as  possible.  Only  one  article  is 
being  manufactured  and  only  one  type  of  this  article.  We 
can  thus  readily  find  the  cost  per  car  by  dividing  the  total 
cost  by  the  number  of  cars  produced,  giving  in  this  case 
$1,721,875  as  the  cost  of  each  car.  If  our  competitors  should 
reduce  the  price  of  cars  of  equal  value  below  that  simi,  we 
must  either  reduce  our  cost  of  manufacture  or  go  out  of 
business.  We  have,  however,  as  yet  no  means  of  deter- 
mining the  relative  efficiency  of  the  several  departments 
of  our  business.  To  do  this  we  must  find  the  cost  of  ad- 
ministration per  unit  of  product,  the  cost  of  materials,  the 
cost  of  power  and  the  cost  of  labor,  etc.,  etc.  By  using  the 
investment  of  the  company  in  each  of  these  departments 
as  a  basis,  and  charging  to  it  its  proportion  of  insurance, 
repairs,  heat,  light,  power,  interest,  depreciation  and 
wages,  we  can  detei-mine  the  extent  to  which  each  of  these 
factors  enters  into  the  final  cost  of  the  manufactured  prod- 
uct. These  costs  can  then  be  compared  from  week  to 
week  and  from  year  to  year  with  the  results  of  operations 
in  the  output  of  cars,  and  any  change  in  the  relative  effi- 


224  MAURICE  H.  ROBINSON 

ciency  of  each  department  may  thus  be  detected  at  once. 
Where  several  departments  of  the  same  character  are  op- 
erated, the  company  is  in  a  position  to  compare  the  relative 
efficiency  of  such  departments.  As  a  result  of  these  com- 
parisons the  department  that  is  lagging  may  be  investi- 
gated and  the  cause  foimd  and  remedied  wherever  possible. 
On  the  other  hand,  departments  that  are  improving  in  effi- 
ciency will  be  known  and  may  be  properly  rewarded. 

An  accounting  system  in  a  well-managed  business  en- 
terprise, then,  is  maintained  not  only  to  show  the  debit  and 
credit  relations  of  the  various  parties  interested,  but,  first, 
to  deteiTQine  the  efficiency  of  the  business  as  a  whole;  sec- 
ond, to  determine  the  relative  efficiency  of  the  various  de- 
partments at  different  times  and  under  different  circiun- 
stances,  when  compared  with  each  other  and  with  other  de- 
partments similarly  situated;  and  third,  to  assist  the  man- 
agement not  only  in  detecting  the  causes  of  inefficiency  and 
applying  the  proper  remedies,  but  also  of  efficiency  and  be- 
stowing the  proper  rewards  upon  those  who  are  responsible 
for  securing  such  results. 


RAILROAD  ORGANIZATION. 

BY  GEORGE  T.  SAMPSON. 

[Division  Engineer,  New  York,  New   Haven  and   Hartford  Railroad.] 

Railroad  organization  is  a  subject  on  whicli  new  chap- 
ters may  be  written  and  required  to  describe  the  condi- 
tions of  each  new  year,  and  I  may  say  month,  of  the  present 
times.  The  recent  years  have  marked  an  epoch  in  rail- 
road history  when  consolidation  has  been  the  rule  in  our 
country,  when  no  scheme  for  uniting  different  companies 
seems  too  great  to  be  considered  and  none  too  great  to 
be  consummated.  It  appears  to  me  as  one  of  the  notice- 
able results  of  the  greater  organizations,  while  in  part 
it  may  perhaps  be  considered  as  a  natural  and  proper 
growth  and  improvement  in  railroad  methods,  that  while 
the  duties  of  the  great  majority  of  men  employed  in  rail- 
road service  continue  on  the  same  general  lines,  with  re- 
sponsibilities much  the  same  as  in  years  past,  there  is  re- 
quired of  nearly  all  a  better  education  and  the  performance 
of  a  greater  amoimt  of  clerical  work  than  was  ever  ex- 
pected in  the  earlier  years. 

The  larger  organization  requires  an  additional  num- 
ber of  active  workers  in  official  and  clerical  positions  not 
previously  considered  as  necessary,  all  working  in  har- 
mony, subject  to  but  one  highest  in  authority  instead  of 
working  on  many  independent  lines.  It  is  because  the 
one  guiding  mind  at  the  head  must  in  some  way  and  man- 
ner be  informed  of  results  attained  and  work  perfonned 
by  the  lowest  subordinate  that  this  additional  clerical  work 
is  required  of  all,  and  it  is  for  the  collection,  compilation 
and  tabulating  of  the  great  mass  of  facts  and  figures  which 

B.II-IS  ^^* 


226  GEORGE  T.  SAMPSON 

come  from  the  subordinates  into  proper  shape  for  the  in- 
telligent consideration  of  the  one  at  the  head  that  the 
greater  corporation  needs  to  employ  more  clerical  assist- 
ance and  to  establish  departments  with  able  men  in 
charge  in  the  intermediate  positions  which  were  not 
thought  of  in  the  earlier  years.  It  is  in  these  new  depart- 
ments, these  intermediate  positions,  that  the  greater  or- 
ganizations of  today  become  evident  and  distinctly  dif- 
ferent from  our  small  organizations  of  twenty-five  or 
thirty  years  ago. 

Let  me  here  call  your  attention  to  plate  No.  1,  a  chart 
or  graphical  representation  of  the  various  departments 
required  for  the  operation  of  one  of  our  larger  corporations 
of  today,  an  organization  operating  about  2,000  miles  of 
located  railroad,  with  total  tracks  of  about  4,000  miles, 
employing  now  about  30,000  persons,  with  annual  earnings 
of  about  $40,000,000.  Notice  that  this  chart  shows  the 
numbers  employed  in  each  of  the  departments;  that  out 
of  a  total  of  30,000,  those  employed  in  the  transportation 
department,  the  freight  department,  and  passenger  depart- 
ment combined,  who  may  be  said  to  be  the  workers  who  earn 
the  income,  number  29,347  persons,  or  98  per  cent  of  the 
whole.  Another  per  cent,  or  304  persons,  conduct  the 
accounting  department  and  keep  the  books,  and  the  re- 
maining departments,  whose  numbers  combined  amount  to 
294  persons,  or  the  remaining  one  per  cent,  are  entrusted 
with  work  which  requires  the  direct  disbursement  of  funds 
or  the  oversight  of  expenditures. 

Also  note  plate  No.  2,  showing  an  organization  operat- 
ing about  2,250  miles  of  located  railroad,  with  total  tracks 
of  about  4,000  miles,  employing  now  about  24,000  persons, 
with  annual  earnings  of  about  $30,000,000.  On  chart  No. 
1,  I  have  attempted  to  show  the  relation  existing  between 
the  highest  and  those  officials  at  the  lower  end  of  the  list, 
which  may  be  spoken  of  as  subdivisions  of  departments, 
in  which  a  considerable  number  may  be  employed  and 


RAILROAD  ORGANIZATION 


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RAILROAD  ORGANIZATION  229 

where  the  ollicial  at  the  head  of  the  same,  witli  well- 
delliied  title  and  duties,  is  charged  with  tlie  execution  of 
woi'k  controlling  the  receipt  or  disbursements  of  funds  or 
material  for  which  he  may  be  required  to  render  an  ac- 
count and  held  responsible  for  the  accuracy  of  the  same. 
It  shows  how  these  lowest  officers  are  related  and  con- 
nected to  the  highest  through  the  intermediate  officers. 

In  a  paper  of  this  kind  it  is  unnecessary  to  attempt 
to  detail  the  duties  of  the  higher  officers.  The  name  of 
the  department  under  their  direction  suggests  in  a  general 
way  the  nature  of  their  work.  The  chart  shows  how  the 
several  departments  are  related.  When  w^e  consider  the 
2,000  miles  and  the  extent  of  the  territory  traversed,  the 
volume  of  new  work  that  must  arise,  the  relations  to  be 
cultivated  and  maintained  with  the  public  and  outside 
interests  pertaining  to  this  work,  the  number  of  subordi- 
nates whose  efforts  are  to  be  supervised  and  directed,  we 
realize  that  their  time  and  attention  must  be  occupied  up 
to  the  full  limits. 

In  the  constniction  department,  which  is  charged  with 
the  duty  of  building,  and  to  a  considerable  extent  main- 
taining, the  right  of  way,  yards,  roadbed,  tracks,  bridges, 
buildings,  water  stations,  etc.,  we  see  it  as  the  duty  of  the 
officer  at  the  head  of  it  to  determine  upon  and  direct  the 
preparation  of  standard  drawings  and  specifications  for  all 
materials  and  mechanical  parts  which  may  enter  into  the 
same,  so  far  as  they  can  be  made  to  serve  the  purpose,  to 
infoiTU  all  the  departments  interested  and  his  subordinates 
of  these  standards;  and  having  decided  upon  work  to  be 
undertaken  and  having  assigned  the  same  among  his  sub- 
ordinates, meaning  particidarly  the  district  engineer  and 
the  di\nsion  engineers  under  him,  we  come  to  an  officer  in 
the  division  engineer  who  may  be  said  to  have  work  that 
is  to  a  great  extent  a  regular  routine.  With  certain  mile- 
age, or  part  of  the  system,  assigned  to  his  care,  it  is  his 
duty,  with  the  assistance  of  the  force  under  him,  to  keej) 


230  GEOEGE  T.  SAMPSON 

tlioroughly  informed  of  all  the  characteristics  of  his  divi- 
sion—its grades  and  alignments;  its  mileage  and  stations; 
its  right  of  way,  fences  and  land  lines;  its  record  of  loca- 
tion and  title  deeds  of  land  o^\aled;  its  highway  and  private 
crossings;  its  yards  and  tracks,  with  the  various  patterns 
of  rails,  frogs  and  switches  used  in  the  same;  to  a  con- 
siderable extent  its  interlocking  systems,  signals  and  build- 
ings; its  bridges,  with  the  age,  length,  strength,  kind,  con- 
dition and  pattern  of  each;  its  w^ater  stations,  with  the 
locations  and  sizes  of  tanks,  pipe  lines  and  water  cranes, 
together  with  the  sources  of  supply  and  their  capacity. 
He  is  expected  to  have  information  on  all  these  subjects 
ready  for  use  at  all  times  on  short  notice;  to  keep  plans 
and  records  perfected  and  correctly  up  to  date. 

In  ascertaining  and  maintaining  the  maximum  clear- 
ance section  of  his  line  he  has  a  work  of  no  small  impor- 
tance, requiring  a  critical  and  painstaking  accuracy  in  in- 
spection and  measurements,  these  to  be  corrected  for  rail 
elevations  and  curve  ordinates;  and  in  making  answers  to 
frequent  inquiries  about  the  possible  movement  of  rolling 
stock  of  unusual  size  from  foreign  lines  arriving  at  junction 
stations. 

Added  to  the  work  above  named,  which  is  largely  a 
matter  of  maintenance,  comes  that  which  is  necessary  in 
planning  and  estimating  for  additions  or  changes  in  ar- 
ranging for  new  construction,  the  specifications,  state- 
ments of  quantities  and  schedules  of  materials.  When,  for 
work  to  be  performed  by  company  employes,  the  material 
needed  is  to  be  purchased  through  the  purchasing  agent 
and  supply  department,  requisitions  must  be  written  on 
proper  blank  forms,  so  specifying  each  item  in  descriptive 
wording  kno^\m  to  the  trade  that  the  correct  and  proper 
article  wdll  be  surely  procured  and  delivered  by  the  party 
who  may  receive  from  the  purchasing  agent  the  order  to 
supply  the  goods. 


RAILROAD  ORGANIZATION  231 

In  the  matter  of  accounts  approved  bills  for  labor  or 
materials  (for  freight  charges  or  ti'ain  expense)  must  be 
forwarded  to  officers  next  above  in  rank,  with  notations 
on  the  same  clearly  stating  their  distribution  under  head- 
ings or  titles  of  accounts  furnished  by  the  accounting 
department. 

From  the  chart  we  note  the  department  of  law,  real 
estate  and  taxes,  and  the  corps  of  officials  needed  for  its 
work.  As  the  corporation  is  a  creation  of  the  law,  so  must 
its  administration  be  conducted  according  to  law,  and  the 
necessity  is  apparent  for  the  employment  of  those  thor- 
oughly versed  in  its  tenets.  All  other  departments  need 
advice  and  information  about  the  law's  requirements  and 
restrictions.  All  kinds  of  legal  talent  are  represented  in 
the  department,  as  counselors  or  advocates  in  civil  or 
criminal  proceedings,  or  as  conveyancers  and  real  estate 
la^^yers. 

The  cor|:)oration  pays  both  its  state  taxes  and,  in  the 
case  of  corporations  doing  interstate  business,  its  fed- 
eral corporation  taxes,  as  well  as  the  local  taxes  as- 
sessed on  property  in  to-^^Tis  and  cities.  By  force  of  cir- 
cumstances largely,  rather  than  from  choice,  the  company 
is  possessed  of  land  and  buildings  to  be  cared  for  and  made 
remunerative;  property  outside  of  that  which  is  absolutely 
necessary  for  the  operation  and  maintenance  of  the  rail- 
road, and  to  properly  execute  its  undertakings  new  pur- 
chases are  frequent.  Tlie  real  estate  and  rent  agents  prove 
quite  as  necessary  for  the  company  as  for  any  large  indi- 
vidual property  owner,  and  they  fill  an  important  place 
in  the  organization. 

The  railroad  corporation  is  a  target  for  all  kinds  of 
claimants.  Its  weak  and  vulnerable  points  of  attack  are 
always  exposed  to  view.  Tlie  claims  presented  are  of  all 
kinds,  honest  and  dishonest,  just  and  unjust,  of  both  large 
and  small  amounts,  arising  from  all  imaginable  and  possible 
causes.    Prominent  among  them  are  personal  injur}'  cases, 


232  GEORGE  T.  SAMPSON 

the  lost  or  damaged  freight  or  baggage  cases  and  fire 
damages. 

It  requires  a  force  of  trained  attorneys  and  agents  to 
consider  and  weigh  the  evidence  in  these  cases,  to  sift  the 
false  from  the  true,  to  decide  which  shall  be  settled  out 
of  court,  which  shall  stand  the  chances  of  trial,  and  to  pre- 
pare a  case  for  trial,  as  well  as  to  conduct  it. 

The  passenger  department,  in  common  with  the  freight 
department,  is  distinctly  one  of  the  money  earners,  its  im- 
portant expenditures  being  practically  only  those  necessary 
to  support  its  employes  in  its  daily  routine,  to  advertise 
its  line  in  an  enterprising,  attractive  and  progressive  man- 
ner and  to  pay  its  bills  for  printing.  While  charged  with 
the  duty  of  maintaining  an  active  and  constant  lookout 
for  new  passenger  business,  of  devising  ways  and  means 
to  secure  and  accommodate  it  when  obtained,  it  is  also 
its  chief  duty  to  fix  the  rate  or  price  for  passenger  travel, 
to  maintain  its  rates  and  sell  its  service  at  a  lawful  and 
reasonable  price;  and  originate  and  continue  in  its  proper 
channels  the  daily  system  of  collection  of  income,  so  es- 
sential for  the  life  of  the  corporation  and  without  which 
it  cannot  long  endure. 

Reference  to  the  chart  of  our  sample  system  shows  at 
the  head  of  the  passenger  department  a  passenger  traffic 
manager,  and  he  assisted  by  one  or  more  general  pas- 
senger agents,  their  number  depending  much  on  local 
peculiarities  of  the  line  or  its  traffic;  a  general  ticket 
agent,  a  general  baggage  agent  and  an  express  agent.  The 
title  of  each  carries  with  it  a  pretty  good  suggestion  and 
definition  of  the  duties  of  each. 

Without  attempting  to  be  too  comprehensive  in  the 
description  of  the  duties  of  these  officers,  suppose  we  take 
up  as  a  single  subject  the  consideration  of  tickets,  their 
issue,  sale  and  collection.  Think  if  you  will  of  the  hun- 
dreds of  passenger  stations  on  a  modem  system.  Con- 
sider for  a  moment  the  multitude  of  combinations  possible 


RAILROAD  ORGANIZATION  233 

and  the  large  liguros  resiiltiug  if  it  should  l;e  found  neces- 
sary to  furnish  a  consideralde  number  of  tickets  for  travel 
from  any  one  station  to  all  others  of  the  system,  to  say 
nothing  of  through  tickets  to  stations  on  connecting  lines. 
Suppose  one  single  new  station  should  be  added  to  the 
system,  would  it  not  be  quite  an  undertaking  and  expense 
to  simply  get  in  order  and  furnish  proof  for  the  printer, 
not  onl}"  in  the  preparation  of  the  tickets  themselves, 
but  in  the  revision  of  the  tariff  sheets  of  rates,  in  the  re- 
vision of  mileage  tables,  in  the  preparation  of  time  tables 
and  folders  and  so  forth  ? 

Tlie  tickets,  having  been  printed  and  made  ready  by 
the  general  ticket  agent,  are  by  him  sent  to  the  station 
agents  for  sale,  a  carefully  prepared  record  having  been 
made  of  the  numbers  delivered  to  each  agent  and  that 
record  also  forwarded  to  the  auditor  of  passenger  receipts. 

The  station  agent,  on  making  sales  of  tickets,  sends 
daily  cash  remittances  to  the  treasurer,  and  monthly  re- 
ports of  all  tickets  sold  and  prices  for  same,  and  tickets 
remaining  unsold,  to  the  auditor  of  passenger  receipts,  tak- 
ing credit  for  cash  paid  out  for  cash  rebate  checks  re- 
deemed. The  passenger  conductor  on  his  train,  ha^Hing 
been  previously  notified  of  the  lawful  issue  of  tickets, 
recognizes  all  such  when  offered  by  the  passenger,  collects 
a  cash  fare  when  no  ticket  is  forthcoming,  issues  to  the 
passenger  a  special  cash  rebate  check  (in  such  case  re- 
taining for  himself  a  duplicate  of  the  same)  and  daily  re- 
mits to  the  treasurer  all  moneys  so  received;  and  forwards 
to  the  auditor  of  jiassenger  receipts  all  tickets  collected 
and  duplicates  of  cash  rebate  checks  issued,  with  reports 
covering  the  same  on  proper  blank  forms. 

Following  the  routine  outlined  above,  the  income  and 
earnings  of  the  passenger  department  are  traced  to  the 
treasury  depai-tment,  and  the  record  and  account  of  sales 
are  so  finally  deposited  with  the  accounting  department. 


234  GEORGE  T.  SAMPSON 

The  advertising  part  of  the  passenger  department  con- 
stitutes no  small  part  of  the  work  in  each  general  pas- 
senger agent's  office,  and  while  large  sums  are  annually 
spent  in  such  work,  still,  like  all  business  which  has  a 
healthy  growth,  there  is  no  doubt  of  the  need  for  the  ex- 
penditure. The  public  wishes  to  know  and  needs  to  know 
all  of  the  scenic  and  historic  attractions  on  the  line,  and 
numerous  pamphlets  and  books  are  issued  descriptive 
of  summer  resorts  and  places  of  interest.  The  pub- 
lic needs  to  have  traveling  made  easy;  needs  to  have  al- 
ways before  them  and  handy  for  ready  reference  leaflets 
and  pocket  time  tables  showing  the  time  for  arrival  and 
departure  of  trains.  The  issue  of  these  pocket  time  tables, 
kept  up  to  date  and  correct  for  all  changes  of  trains,  for  one 
of  our  modern  corporations  annually  reaches  a  number  of 
million  copies.  So  much  I  may  say  and  more  for  the  pas- 
senger department  without  more  than  mention  of  special 
business  which  covers  the  question  of  arranging  prices  and 
accommodations  for  special  excursions,  private  cars,  the- 
atrical troupes,  and  so  forth,  which  are  oftentimes  moved 
over  the  road  on  a  special  time  schedule  arranged  with 
the  transportation  department. 

The  freight  department,  one  of  the  money  earners, 
starting  originally  with  the  simple  proposition  to  arrange 
for  hauling  freight  short  distances  between  local  points 
on  a  single  system,  has  grown  to  an  organization  equipped 
for  a  volume  of  business  enormous  in  its  proportions  and 
far-reaching  in  its  relations.  Under  contracts  and  rela- 
tions now  existing  between  connecting  railroads,  it  is  pos- 
sible to  ship  property  on  a  single  through  bill  of  lading 
across  the  continent,  from  ocean  to  ocean,  and  I  may  per- 
haps add  across  the  ocean  also. 

Special  freight  agents  and  traveling  freight  agents  are 
the  solicitors  for  freight  to  be  shipped  to  competitive  points, 
as  well  as  for  new  business,  paying  proper  attention  to 
freight  claim  matters. 


RAILROAD  ORGANIZATION  235 

Tlie  making  of  l'rci;;lit  rates  is  the  duty  of  the  freight 
traffic  manager,  and  of  the  general  freight  agent,  under 
supervision  of  tlie  former.  The  division  and  percentage  of 
through  rates  is  also  arranged  by  these  officers.  "When 
rates  are  decided  npon,  notices  of  the  same  in  proper  form 
are  sent  to  the  accounting  department  and  to  all  agents 
at  all  stations. 

The  ordinary  routine  business  of  the  freight  department 
is  as  follows:  A  person  desirous  of  forwarding  goods  pre- 
sents with  the  property  to  any  railroad  agent  an  original 
and  duplicate  form  of  shipping  receipt,  on  which  the  goods 
are  enumerated  and  described.  These  are,  if  found  correct* 
signed  by  the  agent  and  the  original  given  to  the  shipper 
as  a  receipt  and  evidence  of  contract.  The  duplicate  is 
held  by  the  agent  as  a  forwarding  order,  and  used  by  him 
in  checking  the  goods  into  the  proper  car,  and  from  it  the 
way  bill  is  written  with  charges  at  tariff  rates.  The  agent 
keeps  a  press  tissue  copy  of  all  way  bills  issued.  If  made 
out  in  season,  way  bills  go  forward  by  the  train  which 
carries  the  goods  in  custody  of  the  freight  conductor. 

All  agents  who  write  a  way  bill  send  a  copy  of  the 
same  to  the  accounting  department,  where  it  is  checked 
as  to  rates  and  proportions.  In  cases  of  through  ship- 
ments to  distant  points  over  connecting  lines,  owing  to 
pressure  of  business  and  to  a  desire  to  make  prompt  de- 
livery, cars  are  often  forwarded  before  the  way  bill  per- 
centages are  figured  out  and  written  in  on  the  way  bills. 
In  such  cases  the  way  bills  are  sent  by  United  States  mail 
to  the  junction  point  at  the  first  connection  with  a  foreign 
road  via  which  the  goods  are  routed,  where  the  respective 
agents  take  the  way  bills  into  account,  the  receiving  agent 
paying  to  the  delivering  agent  the  revenue  camed  up  to 
that  junction  station.  A  terminal  road  and  station  pays 
all  accrued  charges,  and  is  reimbursed  by  collection  from 
the  consignee.  Settlements  with  connecting  roads  at  junc- 
tion stations,  or  with  consignees,  may  be  made  daily,  week- 


236  GEORGE  T.  SAMPSON 

ly,  or  monthly,  as  agreed  upon.  Freight  charges  are  a  lien 
on  the  goods,  and  usually  collections  are  made  when  goods 
are  delivered;  but  where  regular  customers  are  known  to 
be  financially  all  right  credit  arrangements  are  not  un- 
common. 

^Tien  a  shipment  reaches  a  terminal,  it  is  the  first  duty 
of  the  terminal  agent  to  audit  the  way  bill  and  detect  errors 
either  in  rates  or  extensions,  as  well  as  to  check  up  the 
quantity  and  condition  of  the  goods. 

Notwithstanding  all  systems  and  care  used  to  detect 
and  avoid  errors,  they  will  creep  in;  and,  with  cases  of 
accident  and  injury  to  goods,  it  becomes  necessary  to  em- 
ploy a  freight  claim  agent  with  a  clerical  force  under  him 
larger  than  that  which  is  employed  to  originate  and  direct 
the  regular  work  of  the  general  freight  agent's  office. 
Claim  cases  per  year  count  up  into  the  tens  of  thousands. 
It  is  the  duty  of  this  office  to  meet  the  claimants,  to  collect 
all  the  evidence  bearing  upon  each  case  and  to  adjust  the 
same  if  possible. 

In  case  of  through  billing,  where  loss  or  error  occurs  at 
a  distant  point  on  a  foreign  road,  it  often  occurs  that  the 
local  or  terminal  road  settles  with  and  pays  the  claimant 
and  collects  from  the  foreign  road  at  fault,  being  first  con- 
vinced that  the  foreign  road  acknowledges  the  error  and 
will  pay. 

This  matter  of  claims  is  of  such  magnitude  and  impor- 
tance as  to  cause  the  organization  of  the  freight  clain: 
association,  in  which  the  freight  claim  agents  of  each  rep- 
resent the  interests  of  their  respective  roads.  Its  objeci 
is  the  prompt  and  equitable  settlement  of  freight  claims 
with  claimants  and  between  carriers.  It  has  become  at 
interstate  association,  including  206  railroads  as  its  mem- 
bers, representing  167,091  miles  in  the  United  States,  Can- 
ada, and  Mexico  and  5,000  miles  of  water  lines,  combining 
90  per  cent  of  all  transportation  lines  in  North  America, 
Each  railroad  designates  its  representative  in  this  associa- 


RAILROAD  ORGANIZATION  237 

tion,  which  formulates  and  publislies  rules  Tor  llio  unifonn 
guidance  of  each  freight  claim  agent's  oflicc. 

Freight  receipts  are  forwarded  to  the  treasurer  and 
accounted  for  to  the  accounting  department  in  much  the 
same  way  as  has  been  previously  explained  for  the  pas- 
senger department,  and  statements  above  made  about  dup- 
licate wa}^  bills  show  how  the  accounting  dei)artment  can 
check  the  accuracy  of  agents'  reports  and  remittances. 

In  the  transportation  department  the  officer  who  may 
be  said  to  be  most  closely  informed  in  detail  of  the  move- 
ment of  trains  is  the  division  superintendent,  acting  imder 
the  supervision  and  orders  from  a  general  superintendent. 
He  is  expected  to  keep  the  wheels  turning  in  an  orderly 
manner  over  the  mileage  entrusted  to  his  care,  and  to 
promptly  restore  order  in  each  case  should  disorder  arise, 
lie  is  entrusted  with  the  duty  of  preparing  time  tables,  of 
seeing  that  trains  are  safely  handled  in  accordance  with 
the  same,  subject  to  the  standard  rules  and  regulations, 
and  of  enforcing  the  observance  of  the  rules  among  the 
employes.  Every  employe,  while  on  duty  connected  with 
trains,  on  any  division  of  a  road,  is  under  the  authority 
and  must  conform  to  the  orders  of  the  superintendent  of 
that  division. 

As  the  division  superintendent  is  entrusted  with  the 
safe  conduct  of  the  trains,  so  there  is  afforded  to  him,  as 
a  means  to  that  end,  full  control  not  only  of  the  trains 
and  men  employed  on  them,  but  also  of  the  right  of  way, 
roadbed  and  its  structures,  and  all  employed  in  their  main- 
tenance. In  the  performance  of  his  duties  he  is  assisted 
often  by  an  assistant  superintendent  on  lines  where  ])usi- 
ness  is  heavy,  and  always  by  a  train  dispatcher,  a  road- 
master  and  a  bridge  super\'isor.  The  conductors  and  other 
trainmen  and  station  agents  look  to  the  division  super- 
intendent for  their  instructions  in  the  care  of  company 
property,  and  all  matters  other  than  those  of  income  and 
accounts. 


238  GEORGE  T.  SAMPSON 

The  chief  train  dispatcher  has  direct  charge,  imder  the 
superintendent,  of  the  movements  of  all  trains.  He  keeps 
posted  about  the  volume  of  traffic,  orders  out  the  motive 
power  as  needed  and  directs  car  movements  accordingly. 
The  trick  dispatcher  works  eight-hour  tricks.  With  the 
aid  of  the  telegraph  he  keeps  in  mind  where  all  trains  are, 
issues  orders  needed  and  makes  the  entries  on  the  train 
sheet  showing  their  movements.  Operators  at  way  sta- 
tions report  trains  to  him,  and  receive  and  deliver  orders 
to  trainmen. 

The  roadmaster  reports  to  and  receives  instructions 
from  the  sujDerintendent.  He  has  charge  of  the  mainte- 
nance of  the  roadbed,  culverts,  masonry,  tracks,  sidings, 
yards,  depot  grounds,  road  crossings,  and  fences,  and  is 
responsible  for  the  safe  keeping  of  all  material  and  supplies 
used  in  such  work.  He  has  full  control  and  authority  over 
section  foremen,  trackmen,  crossing  gatemen  and  flagmen, 
laborers  and  construction  trains  while  at  work.  It  is  his 
duty  to  report  to  the  superintendent  the  time  of  all  em- 
ployes under  him  on  proper  forms  for  entry  on  payrolls, 
properly  distributing  their  time  to  the  various  works  in 
progress  for  the  information  of  the  accounting  department, 
and  in  similar  manner  make  report  and  distribution  of  ail 
materials  used.  Materials,  supplies,  and  tools  are  to  be 
carefully  inspected  when  first  received  and  checked  by 
the  invoice,  making  prompt  report  in  case  of  discrepancies. 

The  length  of  line  which  may  be  assigned  to  the  care 
of  the  roadmaster  will  vary  considerably,  according  to  local 
conditions  and  peculiarities,  but  in  a  general  offhand  way 
it  may  be  talked  of  at  about  150  miles  or  less.  This  mile- 
age is  divided  into  sections  of  about  3  to  6  miles  each,  and 
each  section  given  its  number,  with  its  limits  clearly  de- 
fined. Each  section  has  its  section  foreman,  and  a  sufficient 
number  of  men  to  properly  perform  the  necessary  work, 
varying  according  to  the  time  of  year,  a  rate  which  aver- 
ages about  one  man  per  mile  for  the  system  through  the 


RAILROAD  ORGANIZATION  239 

spriiiGf  months  and  early  part  of  siimnior,  when  now  ties 
and  rail  oiiii^ht  to  be  put  into  track;  al)Out  three  quarters 
man  per  mile,  after  the  allotted  number  of  ties  have  been 
placed,  through  the  late  summer  and  fall,  and  about  one- 
half  man  per  mile  throup^h  the  greater  part  of  the  winter, 
excepting  when  a  special  extra  force  may  be  hired  for 
cleaning  snow  and  ice  as  occasion  requires. 

The  section  foreman,  or  one  of  his  men  detailed  for  the 
purpose,  is  required  to  examine  the  full  length  of  his  sec- 
tion every  morning.  He  is  also  expected  to  patrol  the 
section,  both  by  day  and  night,  during  heavy  storms  or 
violent  winds,  and  to  especially  watch  all  points  where  ob- 
structions are  liable.  He  also  must  keep  informed  of  the 
time  tables  and  the  rules  for  the  movements  of  trains;  must 
keep  well  supplied  with  torpedoes,  flags,  lanterns,  and  all 
stop  signals,  and  be  possessed  of  intelligence  to  properly 
use  the  same. 

The  bridge  supervisor  reports  to  and  receives  instruc- 
tions from  the  division  superintendent.  His  work  on  the 
maintenance  and  repairs  of  bridges  brings  him  into  close 
relations  with  the  engineering  department,  requiring  fre- 
quent conference  as  to  the  best  methods  to  be  employed 
or  plans  to  be  adopted.  He  is  required  to  make  frequent 
inspections  and  keep  informed  in  detail  of  the  condition 
of  all  structures  under  his  care.  Large  quantities  of  lumber 
and  other  material  are  used  under  his  direction.  It  is  his 
duty  to  inspect  and  check  up  material  by  the  invoices, 
to  report  discrepancies  or  mark  his  approval  on  the  bills 
if  found  correct  as  to  quality  and  quantity.  Eeports  show- 
ing distribution  of  expense  for  material  and  labor  arc  re- 
quired also  in  his  case.  He  is  also  required  to  be  familiar 
with  and  obedient  to  the  mlos  governing  trains,  trainmen, 
and  other  classes  of  employes,  so  far  as  they  relate  to  the 
proper  discharge  of  his  duties.  He  needs  to  be  a  thorough 
mechanic,  ingenious,  and  quick  to  act  in  emergency;  of 


240  GEORGE  T.  SAMPSON 

sound  judgment  as  to  the  strength  of  materials,  industri- 
ous, and  energetic. 

Conductors,  in  common  with  locomotive  engineers,  on 
both  passenger,  freight,  and  work  trains,  are  required  to 
handle  their  trains  according  to  the  time  tables  and  the 
orders  issued  by  the  superintendent.  It  is  the  duty  of 
the  conductors  to  make  record  of  and  to  report  to  the 
superintendent  the  numbers  and  initials  of  cars  as  moved 
in  their  trains,  whether  loaded  or  empty;  and  at  stations 
named  in  the  time  tables  as  registry  stations  to  make  entry 
in  books  provided  showing  the  time  of  arrival  and  departure 
of  trains,  the  numbers  of  locomotive  and  cars  and  the  name 
of  engineer  and  conductoi-.  Conductors  must  also  report 
car  initials  and  numbers  as  moved  in  their  trains,  and  state 
whether  loaded  or  empty,  in  the  same  manner  as  agents. 

Station  agents  report  to  and  receive  orders  from  the 
division  superintendent,  and  also  obey  orders  and  instruc- 
tions issued  by  the  officers  of  other  departments  with  which 
they  have  business  relations.  They  also  make  report  to 
the  manager  of  the  car  service  association.  At  a  small 
station  the  agent  acts  also  as  telegraph  operator,  while 
the  larger  and  important  stations  have  a  freight  agent,  a 
ticket  agent,  and  operators  also.  Agents  are  responsible 
for  the  general  condition  of  the  buildings,  yards,  and 
company  property  at  their  station,  and  look  out  for  the 
company's  interests  in  their  city  or  town.  It  is  a  part 
of  their  duty  to  see  that  side  tracks,  switches,  signals,  and 
lights  at  their  station  are  kept  in  order;  to  see  that  cars 
are  properly  placed  for  loading  and  unloading;  to  see  that 
loads  placed  in  freight  cars  are  such  as  to  have  them  move 
generally  in  a  homeward  direction;  to  see  that  cars  before 
loading  are  in  proper  order  to  receive  freight;  that  loads 
on  open  cars  are  within  proper  limits,  and  that  cars  are 
not  overloaded;  and  in  cases  where  freight  is  found  to  be 
damaged  or  short  of  quantity  as  billed,  to  make  a  complete 
record  of  all  conditions  and  circumstances.    Proper  wajj 


RAILROAD  ORGANIZATION  241 

bills  must  always  accompany  all  freight  packages  or  cars. 
The  agent  is  required  to  handle  the  United  States  mail 
according  to  fixed  rules.  Each  agent  sends  daily  reports, 
by  telegraph  if  possible,  to  the  car  accountant,  showing 
freight  cars  wanted,  on  hand  and  to  spare.  lie  also  sends 
daily  repoi*ts  on  proper  blank  forms  showing  car  initials 
and  numbers  in  detail  of  all  arrivals  and  departures  by 
train  numbers  and  of  cars  remaining  at  his  station.  From 
the  information  so  obtained,  the  car  accountant  is  enabled 
to  properly  distribute  cars  of  the  proper  kind  to  the  sta- 
tions where  most  urgently  needed  with  the  minimum 
length  of  haul,  and  also  to  direct  the  movement  of  freight 
cars  in  a  homeward  direction. 

The  car  accountant  is  also  thus  enabled  to  keep  an 
account  of  all  cars  and  of  the  mileage  of  both  home  and 
foreign  cars.  Based  on  these  records  of  mileage  kept  by 
the  car  accountant,  settlements  are  made  with  foreign 
roads  for  the  use  of  cars  at  the  rate  of  one-half  cent  per 
mile.  For  the  settlement  of  demurrage  charges,  station 
agents  are  also  required  to  send  daily  reports  to  the  car 
association,  stating  in  detail  car  numbers  and  initials,  dates 
and  time  of  day  they  are  placed  for  either  loading  or  un- 
loading. The  demurrage  rule  is  that  for  loading  or  unload- 
ing freight  cars  consignees  or  shippers  are  allowed  ninety- 
six  hours  after  the  car  is  placed  in  an  accessible  position, 
and  if  the  consignee  or  shipper  requires  more  time,  he  is 
required  to  pay  for  the  detention  at  the  rate  of  one  dollar 
per  car  per  day. 

The  machinery  department,  as  a  part  of  the  transporta- 
tion department,  is  under  the  super^^ision  of  the  superin- 
tendent of  motive  power,  and  subordinate  to  him  are  the 
general  master  mechanic  in  charge  of  locomotives  and  shops 
and  the  master  car  builder. 

The  general  master  mechanic  supervises  the  division 
master  mechanics  and  roundhouse  foremen.    The  master 


B.II-16 


242  GEORGE  T.  SAMPSON 

car  builder  supervises  the  car  shop  foremen  and  car  in- 
spectors. 

As  a  rule  it  may  be  stated  that  but  few  roads  now  build 
their  own  rolling  stock,  finding  it  more  economical  to  pur- 
chase and  have  them  built  by  contract  with  outside  firms, 
and  finding  their  shop  facilities  generally  kept  busy  up 
to  their  capacity  by  their  repair  work.  The  extent  and 
importance  of  repairs  on  rolling  stock  can  be  realized  when 
I  state  that  it  is  generally  allowed  by  railroad  men  that 
about  10  per  cent  of  the  entire  number  of  locomotives  are 
in  the  shops  for  repairs  constantly. 

Shops  for  locomotive  and  car  repairs  of  considerable 
extent  are  located  at  points  most  favorable.  Minor  and 
less  important  repairs  on  locomotives  are  made  at  the 
roundhouses;  such  as  can  be  made  without  placing  them 
out  of  service.  Car  inspectors'  shops  and  outfits  are  main- 
tained at  terminals  and  junction  stations  with  foreign 
roads. 

Locomotives  seldom  leave  the  rails  of  the  home  road. 
At  junction  stations  all  cars  arriving  from  foreign  roads 
must  pass  under  the  eye  of  the  car  inspector.  As  to  size 
of  the  car  or  its  load,  it  must  be  within  the  advertised 
clearance  limits;  and  it  also  must  be  in  safe  and  secure 
condition  in  all  its  details,  and  not  be  overloaded  beyond 
its  rated  capacity;  otherwise  the  car  inspector  orders  it 
to  be  sidetracked  and  the  home  road  refuses  to  accept  and 
handle  it  until  its  defects  are  remedied  by  the  foreign 
road  if  it  is  a  car  defect,  or  by  the  shipper  or  consignee 
at  times  if  improperly  loaded  in  a  way  for  which  they  are 
responsible.  Car  inspectors  make  repairs  of  injuries  or 
broken  parts  when  such  can  be  made  by  the  replacement 
of  ready-made  standard  parts,  of  which  they  keep  a  stock 
on  hand.  In  case  more  extensive  repairs  are  needed  cars 
are  sent  to  the  extensive  main  repair  shops. 

Speaking  in  a  general  way,  it  may  be  said  that  shops 
for  locomotive  construction  or  repairs  consist  of  the  black- 


RAILROAD  ORGANIZATION  243 

smith  shop,  a  foundry  at  times,  the  machino  shop,  and 
the  erecting  shop;  and  for  car  work  the  bhicksmith  shop, 
the  wood  working  shop,  the  erecting  shop,  and  the  paint 
shop.    Eacli  of  these  shops  has  its  foreman. 

Division  master  mechanics  and  shop  foremen  need  to 
employ  considerable  office  or  clerical  forces.  In  these 
offices  the  payrolls  and  requisitions  for  material  are  made 
out,  and  thence  to  the  superior  officers  for  approval  and 
through  the  usual  channels  hereinbefore  mentioned. 

Records  and  accounts  of  considerable  interest  are  kept 
in  this  department,  among  which  may  be  mentioned  the 
method  of  guarantee  and  mileage  account  kept  for  the 
purchase  of  wheels,  in  order  to  make  sure  that  the  utmost 
care  shall  be  taken  at  all  times  in  their  manufacture. 


ORGANIZATION  OF  A  PURCHASING  DEPARTMENT 
ON  RAILROAD  SYSTEMS.* 

BY  EDWARD  NORTON  CHILSON. 

[Purchasing  Agent,  J.  A.  White  &  Co.] 

This  subject,  in  the  main,  has  been  the  basis  of  consid- 
erable thought,  study  and  discussion  in  railroad  circles. 
Many  papers  relating  to  it,  from  time  to  time,  have  been 
placed  before  conventions  and  various  railroad  clubs 
throughout  the  country,  and  to  this  day  it  is  one  of  the  most 
interesting  and  probably  the  least  understood  of  the  com- 
plex problems  confronting  the  present-day  railroad  man- 
ager. 

A  thoroughly  equipped  and  competent  department  to 
conduct  the  purchase  of  materials  and  supplies  for  large 
trunk  lines  is,  and  undoubtedly  always  will  be,  an  impor- 
tant factor  in  the  success  thereof,  and  should  be  looked 
upon  by  the  railroad  managers  throughout  the  country  not 
only  as  one  of  the  necessities  but  as  one  of  the  vital  and 
profitable  functions  of  railroad  business. 

In  the  preparation  of  this  paper  attempt  was  made  to 
confine  the  thought  entirely  to  the  department,  and  the 
methods  employed  therein  for  the  strict  enforcement  of 
departmental  rules  for  the  maintenance  of  a  system  where- 
by the  widest  possible  range  of  action  may  be  confined 
within  limits  which  can  be  controlled  by  a  minimum  num- 
ber of  emi3loyes;  and,  if  digression  is  resorted  to,  it  is  with 
the  purpose  of  emphasizing  the  importance  of  the  various 
elements  which  when  properly  arranged  constitute  the 
system. 

We  should  bear  in  mind  that  railroad  managers  are  con- 
stantly looking  for  weak  spots  in  their  complex  organiza- 

*  Courtesy  of  Journal  of  Accountancy. 

244 


A  RAILROAD  PURCHASING  DEPARTMENT  245 

tion,  endeavoring  to  eliminate  from  the  many  departments 
the  employment  of  needless  and  incompetent  help.  It  is 
therefore  of  prime  importance  that  the  purchasing  agent 
carefully  select  intelligent  and  useful  persons  to  carry  out 
the  policy,  and  to  adhere  to  the  system  laid  down  for  the 
departmental  operation. 

It  is  also  a  fact  that  the  system,  no  matter  how  per- 
fectly applicable  to  the  work  of  a  purchasing  department, 
will  not  be  maintained  at  the  highest  stage  of  its  efficiency 
without  the  hearty  co-operation  of  each  and  every  em- 
jDloye;  for  the  best  office  systems  fail  when  it  is  attempted 
to  make  them  so  automatic  as  to  invite  neglect.  Our  start- 
ing point,  therefore,  in  the  organization  of  a  purchasing 
department  is  the  emplo\Tnent  of  a  competent  man  to  act 
as  purchasing  agent. 

The  Purchasing  Agent. 

Tlie  duties  of  an  up-to-date  purchasing  agent  are  quite 
difficult  and  should  not  be  looked  upon  lightly,  for,  in  addi- 
tion to  his  being  an  administrative  officer,  he  remains  the 
man  of  details.  At  least  the  writer's  experience  has  been 
such  that  he  found  it  impossible  to  throw  aside  details, 
owing  to  the  fact  that  it  is  paramount  for  the  department's 
success  for  one  to  keep  a  hand  on  the  pulse  of  the  entire 
organization;  and  those  who  cnteriain  hopes  of  becoming 
identified  at  some  future  time  with  this  particular  field  may 
be  assured  that  hard  work  and  conscientious  endeavor  are 
"s'itally  necessary.  The  work,  however,  is  interesting  and 
pleasant  and  leads  to  higher  posts  and  responsibilities  in 
railroad  service. 

The  business  training  of  a  purchasing  agent  is  of  the 
best;  his  duties  are  diversified,  his  field  of  action  country- 
wide, and  his  acquaintance  among  business  men  broad  and 
comprehensive. 

It  has  been  said  that  the  purchasing  agent,  although  a 
responsible  head  of  a  railroad  department,  performs  his 


246  EDWARD  NORTON  CHILSON 

duties  to  greater  disadvantage  than  do  the  heads  of  other 
departments,  and  with  less  official  recognition.  This  may 
have  been  true  in  the  early  stages  of  American  railroading; 
but  today  it  is  different,  as  the  purchasing  agent,  if  a  good 
one,  usually  is  recognized  by  his  superiors,  and  his  meri- 
torious work  is  placed  upon  a  high  plane  of  achievement. 
It  is  true  that  in  the  past,  railroad  purchasing  agents  have 
not  advanced  in  position  and  remuneration  as  have  the 
other  department  heads,  such  as  freight  and  passenger  offi- 
cials, and  officials  in  the  transportation  and  mechanical 
departments,  but  today  the  purchasing  agent  is  valued 
just  as  highly  and  is  receiving  remuneration  according  to 
his  merits.  He  should  be  one  of  the  highly  paid  officials, 
not  because  it  is  necessary  to  place  a  premium  upon  his 
honesty,  but  because  his  work  is  important,  his  position 
lofty  in  the  true  sense  of  the  word,  and  his  vocation  one 
that  requires  long  years  of  training  and  careful  study. 
Through  this  department  large  sums  of  money  are  spent 
annually,  and  the  spending  of  this  money  for  materials  and 
supplies  is  no  easy  task,  provided  judicious  and  economical 
expenditure  obtains.  In  this  department  large  sums 
annually  may  be  saved  or  wasted. 

The  Assistant  Purchasing  Agent. 

This  man  should  be  well  endowed  with  alert  mental  and 
physical  capabilities.  To  him  the  work  passes  from  the 
hands  of  his  chief.  He  should  be  a  good  executive,  capable 
of  handling  all  departmental  work  in  the  absence  of  his 
superior;  an  impartial  judge  and  a  watch  dog.  His  duties 
are  many  and  diversified  and  equally  interesting  with  those 
of  the  purchasing  agent.  It  is  customary  on  the  larger 
railway  systems  for  the  purchasing  agent  to  delegate  cer- 
tain lines  of  purchasing  to  his  assistant,  the  details  of  which 
he  is  supposed  to  follow  and  conclude,  reporting  all  such 
to  his  superior  in  the  concrete.  As  it  is  necessary  for  the 
purchasing  agent  to  absent  himself  from  the  department 


A  RAILROAD  PURCHASING  DEPARTMENT  247 

at  frequent  intervals,  the  selection  of  a  capable  assistant 
to  conduct  the  business  of  the  de])artin('nt  during  such 
periods  of  absence,  is  of  the  utmost  inipoilance. 

The  Chief  Clerk. 

Primarily  it  is  the  duty  of  this  employe  to  carry  on  the 
routine  work  of  the  department  under  the  immediate  super- 
vision of  the  assistant  purchasing  agent,  to  whom  he  re- 
ports, and  to  conduct  such  purchasing  as  may  be  delegated 
by  the  assistant  purchasing  agent.  He  is  responsible  for 
the  detail  work  within  the  department,  and  the  employ- 
ment of  all  clerks,  and  necessarily  nuist  be  a  man  with  a 
keen  understanding  of  the  system. 

The  Price  Clerk. 

The  duties  of  this  emi)loye  consist  chiefly  in  the  send- 
ing out  of  inquiries,  the  procuring  of  prices,  the  intelligent 
tabulation  of  these  for  presentation  to  the  chief  clerk,  the 
assistant  purchasing  agent,  or  the  purchasing  agent.  He 
must  be  a  man  well  acquainted  with  the  material  markets 
of  the  country,  with  manufacturers  and  their  products,  and 
should  possess  a  full  knowledge  of  the  technical  descrip- 
tion of  materials  and  supplies.  It  is  also  his  duty  to  keep 
a  card  index  of  prices,  which  serv^es  as  a  barometer  of  the 
various  markets,  and  from  which  the  invoices  covering  ma- 
terials and  supplies  j^wrchased  are  checked  and  certified 
as  to  their  correctness  prior  to  their  being  passed  to  the 
purchasing  agent  for  approval. 

The  catalogue  file  of  the  department  should  contain 
catalogues  of  almost  every  manufacturing  institution  in 
the  country  and  must  needs  be  kept  up-to-date  and  in  such 
condition  that  easy  reference  may  be  made  thereto,  not 
only  as  to  manufacturers  names,  but  as  to  the  particular 
materials  and  sup])lies  handled.  Therefore,  in  connection 
with  many  such  files  may  be  found  a  cross  reference  sys- 
tem, usually  in  the  shape  of  a  card  index,  in  which  the  cata- 


248  EDWARD  NORTON  CHILSON 

logues  are  refen^ed  to  by  names,  and  cross  references  made 
as  to  materials  and  supplies  handled  by  each  manufacturer. 
This  system  is  usually  placed  under  the  immediate  jurisdic- 
tion of  the  price  clerk. 

An  inquiry  list  should  be  kept  up-to-date  by  the  price 
clerk  and  his  assistants,  in  which  list  should  be  found  the 
names  and  addresses  of  manufacturers  of  raihvay  mate- 
rials and  supplies,  alphabetically  arranged  and  numerically 
compiled,  so  that  when  a  requisition  is  received  from  the 
stores,  mechanical,  or  any  other  department,  it  is  only 
necessary  for  the  purchasing  agent,  assistant  purchasing 
agent  or  chief  clerk  to  mark  opposite  the  various  items 
thereon  the  numbers  on  the  lists  under  which  the  various 
items  are  classified.  Inquiries  are  then  sent  into  the 
market,  prices  obtained  and  tabulated,  and  orders  placed 
with  the  lowest  bidders,  consideration  being  given  to  qual- 
ity of  materials  and  shipping  dates. 

The  duties  of  other  employes  in  the  department,  such 
as  stenographers,  file  clerks,  accountants,  etc.,  etc.,  while 
important,  cover  such  minute  detail  work  as  prescribed  by 
the  system,  that  it  is  hard  to  explain  them  in  a  few  words. 
Consequently  no  attempt  will  be  made  to  outline  them  in 
this  paper. 

It  might  be  well  to  refer  to  the  requisition  as  the  nu- 
cleus around  which  the  entire  departmental  work  is  cen- 
tered. Eequisitions  are  issued  by  the  various  depart- 
ments, setting  forth  in  detail  the  materials  and  supplies  re- 
quired for  the  operation  of  the  road,  and  are  usually  sent 
directly  to  the  purchasing  agent,  after  being  approved  by 
the  proper  officials.  These  requisitions  should  convey 
complete  information,  including  correct  technical  descrip- 
tion, as  well  as  shipping  instructions  and  dates  when  ma- 
terials are  required  at  destination.  The  requisitions  upon 
reaching  the  purchasing  department  are  put  through  the 
system  as  previously  described,  for  the  placing  of  orders. 

After  the  order  is  ;glaced  the  next  move  is  to  see  that 


A  RAILROAD  PURCHASINa  DEPARTMENT  249 

no  delay  takes  place  in  the  fulfillment  thereof.  The  "fol- 
low-up" clerks  are  busily  enc^aged  in  connnuni eating  with 
the  vniious  manufacturei-s  in  ascortainini^^  the  probable 
shipping  dates  and  in  tracing  shipments  after  they  are 
made.  The  efficiency  of  the  average  purchasing  depart- 
ment could  be  materially  increased  by  the  employment 
of  competent  men  in  sufficient  numbers  to  follow  shipments 
from  the  time  orders  are  placed  until  the  material  arrives 
at  destination.  Such  employes  should  be  aggressive  and 
possess  a  good  general  knowledge  of  shop  conditions  and 
transportation  methods. 

When  we  take  into  consideration  the  facts  that  the  lack 
of  mateiials,  such  as  bolts,  nuts,  jouraal  bearings,  sheet 
steel,  lumber,  grate  bars,  wheels  and  axles,  etc.,  might  be 
withholding  from  service  locomotives  and  cars,  and  that 
the  railroad  company  loses  revenue  when  such  equipment 
is  withheld  from  service,  the  importance  of  placing  or- 
ders promptly  and  following  shipments  is  self-evident. 
This  applies  not  only  to  the  rolling  stock,  but  to  all  mate- 
rials and  supplies  purchased  for  other  branches  of  the 
sennce. 

The  writer  has  known  cases  where  lack  of  small  mate- 
rials, due  to  slow  action  on  the  part  of  the  purchasing  de- 
partment, withheld  equipment  from  service,  or  delayed 
shop  peifoi-mance,  and  caused  the  railroad  company  to  lose 
considerable  money.  On  the  other  hand,  it  is  of  equal  im- 
portance that  the  various  departments  anticipate  their  re- 
quirements as  far  in  advance  as  possible,  in  order  that  the 
purchasing  department  may  have  opportunity  for  making 
a  careful  solicitation  of  the  market  to  obtain  the  lowest 
prices  and  may  still  allow  reasonable  time  for  delivery. 

The  important  railway  systems  of  the  country  employ 
an  engineer  of  tests  or  chemist,  to  act  as  chief  of  the  in- 
spection bureau,  under  whom  a  corps  of  experienced  in- 
spectors is  employed  to  pass  upon  the  quality  of  materials 
and  detennine  whether  or  not  they  meet  the  specifications. 


250  EDWARD  NORTON  CHILSON 

This  bureau  assists  the  various  departments  in  preparing 
specifications. 

It  is  the  duty  of  the  testing  engineer  to  pass  upon  all 
materials  either  prior  to  shipment  from  the  works  or  after 
arrival  at  destination.  A  great  deal  pro  and  con  may  be 
said  on  this  system,  and  while  it  has  undoubtedly  proved 
benefi,cial  to  the  railroads,  it  might  be  greatly  improved 
upon. 

The  importance  of  adopting  uniform  standards  of  prac- 
tical design  for  articles  used  in  large  quantities  is  self-evi- 
dent.   These  standards  are  recommended  by  the  various 
department  heads.     Wherever  this  is  done  it  serves  to 
lessen  the  burden  of  the  purchasing  department,  and,  from 
a  commercial  point  of  view,  is  indeed  profitable,  as  it  nar- 
rows the  field  and  permits  the  purchasing  agent  to  make 
annual  contracts  for  known  quantities  (usually  on  a  unit 
basis  or  a  sliding  scale  basis),  and,  moreover,  it  serves 
to  simplify  the  work  in  the  purchasing  department.    The 
adoption  of  standards  also  redounds  to  the  benefit  of  the 
railroad,  as  when  manufacturers  are  furnished  with  speci- 
fications of  a  given  quantity  of  material  or  supplies,  such 
specifications  minutely  describing  what  is  required,  they 
are  placed  in  a  position  to  submit  the  closest  possible  prices 
upon  which  they  can  afford  to  take  the  business.    On  the 
other  hand,  if  the  inquiry  or  the  specification  is  vague  and 
incomplete,  the  manufacturer  usually  figures  a  liberal  al- 
lowance for  uncertainties.     Furthermore,  if  the  manu- 
facturers know  that  the  railroad  companies  are  adhering 
to  certain  standards,  which  remain  in  use  for  a  given  length 
of  time,  and  that  during  that  time  there  will  be  no  change 
of  standard,  they  will  usually  quote  their  lowest  figures 
with  the  hope  of  securing  orders  continuously.    Again,  the 
concentration  of  materials  and  supplies  under  standards 
serves  to  establish  uniformity,  and  lessens  considerably  the 
task  of  placing  orders,  inspecting  material,  and  following 
shipments. 


A  RAILROAD  PURCHASINa  DEPARTMENT  251 

The  tie  and  timber  question  is  a  serious  one,  especially 
TN'ith  railroads  in  the  East  and  ^liddle  West.  The  large 
lines  employ,  under  the  jurisdiction  of  the  jnirchasing 
agent,  a  tie  and  timber  agent,  whose  sole  duty  is  too  look 
after  the  purchase  of  lumber,  timber  and  ties.  Some  rail- 
roads also  employ  a  corps  of  inspectors  to  inspect  such 
materials  prior  to  shipment,  while,  on  the  other  hand,  some 
inspect  and  pass  upon  all  such  shipments  at  destination. 

The  purchase  of  fuel  in  some  instances  is  a  matter  of 
specialization.  Some  railroads  employ  a  fuel  agent  to  look 
after  their  requirements  in  this  line — this  pex'son  usually 
reporting  to  the  purchasing  agent. 

Relations  With  Stores  Department. 

The  stores  department  is  important  and  comes  in  for 
its  share  of  glory  and  criticism,  and  while  it  should  not,  in 
the  writer's  judgment,  come  under  the  direct  management 
of  the  purchasing  department,  there  should  be  the  closest 
haimony  possible.  Frequent  conferences  should  take  place 
between  the  heads  of  these  departments  in  order  that  the 
most  effective  and  economical  methods  may  be  pursued 
in  the  handling  of  materials  and  supplies  that  are  pur- 
chased and  delivered  to  the  various  store  houses  along  the 
line  of  road.  In  the  store  houses  of  the  large  trunk  lines 
may  be  found  hundreds  of  thousands  of  dollars'  worth  of 
materials  and  supplies  for  maintenance  and  operation,  and, 
as  it  is  paramount  that  the  jDurchasing  department  ^vork 
along  economical  lines,  a  good  service  is  rendered  by  keep- 
ing in  close  touch  with  the  stores  department,  to  the  end 
that  the  actual  use  of  materials  and  supplies  may  be  clearly 
understood. 

Upon  some  railway  systems  the  superintendent  of 
stores  or  general  store-keeper  reports  to  the  purchasing 
agent,  but  those  instances  are  in  the  minority.  It  is  con- 
sidered by  some  that  the  duties  of  this  department  are 
such  that  it  should  report  directly  to  the  general  manager, 


252  EDWARD  NORTON  CHILSON 

general  auditor,  or  mechanical  superintendent.  It  is  tli6 
writer's  judgment  that  the  head  of  this  department  should 
report  to  the  general  auditor,  as  his  duties  practically 
amount  to  those  of  an  accountant  in  charge  of  distribution 
of  materials  and  supplies  to  the  various  departments. 

There  should  also  be  the  closest  accord  between  the; 
purchasing  department  and  the  auditing  department,  as 
they  have  a  great  deal  in  common  and  the  understanding 
between  the  two  should  be  complete. 

Another  important  feature  of  the  stores  department 
which  engages  the  attention  of  the  purchasing  department, 
is  that  of  collecting  and  sorting  scrap  materials  left  from 
the  repairs  of  locomotives,  cars,  bridges  and  maintenance 
of  roadway,  etc.  Usually  these  collections  are  reported 
to  the  purchasing  department  monthly,  and,  upon  receipt 
of  such  reports,  systematically  tabulated  statements  of  the 
various  amounts  of  scrap  iron  and  steel,  copper,  rubber, 
steel  rail,  bagging,  rope,  etc.,  are  made  and  sent  to  the 
various  points  throughout  the  country  where  the  best 
markets  obtain.  A  date  is  set  for  the  sale  and  the  material 
awarded  to  the  highest  reputable  bidders.  Shipping  in- 
structions are  then  issued  to  the  stores  department  and  the 
storage  bins  are  once  again  emptied.  To  give  you  some 
idea  of  the  volume  of  this  particular  branch  of  the  business, 
the  writer  conducted  the  sale  of  scrap  materials  within  a 
period  of  two  years,  aggregating  two  million  dollars,  dur- 
ing his  connection  with  one  of  the  large  eastern  steam  rail- 
road companies,  and  you  may  rest  assured  that  no  little 
amount  of  work  was  entailed  in  the  judicious  handling 
thereof. 

Relations  With  Traffic  Department. 

The  purchasing  agent  should  keep  in  close  touch  with 
the  traffic  officials  to  the  end  that  the  industries  along  the 
line  of  road  may  be  fostered  and  given  opportunity  to  sell 
the  railroad  such  supplies  and  materials  as  they  manu- 


A  KAILROAD  PURCHASmQ  DEPARTMENT  253 

facturc.  This  ia  especially  (l(\sirablo,  as  the  industrial  de- 
partment is  constantly  on  the  lookout  for  new  industries 
to  locate  on  the  line  and  the  purchasing  department,  hy 
extending  a  helping  hand  to  the  manufacturers  along  the 
line,  serves  a  good  purpose. 

The  industrial  department  usually  operates  under  the 
."jurisdiction  of  the  traffic  department,  and  makes  arrange- 
ments with  new  industries,  with  the  view  of  having  them 
locate  at  various  points  along  the  line,  and  all  such  new 
branches  of  business  serve  materially  to  increase  the 
revenue  of  the  road  from  both  a  freight  and  a  passenger 
standpoint. 

It  is  the  writer's  idea  that  the  purchasing  agent  should 
keep  in  touch  with  the  manufacturing  industries  along  the 
line;  at  least  he  should  visit  them  often  with  some  of  the 
traffic  officials,  as  such  ^dsits  cannot  help  but  promote  good 
feeling  between  the  shippers  and  the  traffic  department. 
We  should  remember  that  the  manufacturing  industries 
on  the  line  represent  the  backbone  of  tlie  railroad,  and  all 
railroads  would  do  well  to  create  an  interest  such  as  we 
have  outlined. 

The  writer  does  not  believe,  however,  in  paying  more 
money  to  these  manufacturing  companies  for  materials  and 
supplies  which  might  be  procured  elsewhere  for  less  money. 
In  other  words  they  should  not  be  paid  a  premium  just  be- 
cause they  happen  to  be  located  on  the  line.  Piices  may  be 
set,  however,  by  the  purchasing  department  from  time  to 
time,  at  which  they  vriW  place  orders,  and  if  the  manu- 
facturers along  the  line  ^^'ish  the  railroad's  business  they 
might  have  some  of  it  at  such  figures. 

We  should  remember  that  competition  is  the  life  of 
trade  and  where  solicitation  is  made  among  many  manu- 
facture!^ for  prices  on  materials,  the  orders  should  be 
placed  strictly  according  to  the  merits  of  such  competition; 
and  while  the  manufacturers  along  the  line  should  be  given 
due   consideration,   and  in  some  cases  preference,   they 


254  EDWARD  NORTON  CHILSON 

should  not  be  permitted  to  meet  the  other  fellow's  figures. 
If  this  practice  is  resorted  to,  the  trade  soon  becomes  ac- 
quainted with  the  fact  and  it  is  only  a  matter  of  time  be- 
fore the  railroad  company  finds  itself  in  difficulty.  Oft- 
times  such  methods  restrict  competition  and  cause  many^ 
manufacturing  companies  to  withhold  their  best  figures. 

In  the  matter  of  extensive  purchases,  such  as  locomo- 
tives, cars,  shop  machinery,  etc.,  and  supplies  in  current 
use  that  may  be  purchased  according  to  specifications,  the 
railroad  companies  would  do  well  in  certain  instances  to 
place  the  business  upon  the  basis  of  sealed  proposals,  such 
proposals  to  be  opened  at  an  appointed  time  and  in  the 
presence  of  all  bidders.  This  statement  is  made  advisedly, 
due  to  the  acts  of  favoritism  that  have  from  time  to  time 
been  brought  to  the  writer's  attention.  We  should  con- 
sider the  railroad  companies  as  public  institutions,  main- 
tained for  and  fostered  by  the  people,  and  surely  the  pur- 
chase of  material  and  supplies  should  be  done  with  a  view 
of  fairness  to  all. 

The  lines  of  demarcation  in  most  of  the  larger  railroad 
organizations  usually  are  well  defined.  They  are  not  on  all, 
however,  as  on  some  roads  the  purchasing  agent  bears  the 
title  only,  and  in  fact  ranks  little  above  the  clerk,  as  his 
duties  are  limited  to  the  purchase  of  ordinary  materials 
and  supplies,  and  the  more  important  contracts  are  nego- 
tiated by  the  president,  vice-president  or  general  manager. 

Previously  the  writer  mentioned  the  fact  that  some  rail- 
roads employ  tie  and  timber  agents,  and  fuel  agents,  and 
on  some  railroads  it  is  not  uncommon  for  such  persons  to 
report  to  others  than  the  purchasing  agent.  It  is  the 
writer's  firm  belief  that  they  should  come  under  the  watch- 
ful eye  of  the  general  purchasing  officer. 

The  importance  of  undivided  responsibilities  should 
not  be  minimized,  for  if  manufacturers  and  supply  men  are 
given  to  understand  that  the  purchasing  department  is  theJ 
final  court  of  resort  and  the  department  through  whicli 


A  RAILROAD  PURCHASING  DEPARTMENT  255 

they  must  do  businoRs,  it  plaros  a  known  (jiiantity  of  powor 
in  the  hands  of  that  department,  which  eannot  help  but 
redound  to  the  material  benefit  of  the  railroad  at  lar^e. 

The  mere  fact  that  orders  are  issued  by  the  purchasing 
accent  does  not  necessarily  mean  that  all  preliminaries  per- 
taining: to  the  issuance  of  such  orders  were  handled  by  the 
purchasing  department,  as  in  most  instances  the  details 
are  whipped  into  shape  and  negotiations  concluded  by 
othei's  before  the  matter  reaches  the  purchasing  depart- 
ment, and,  in  such  cases,  the  title  of  purchasing  agent  is  a 
mockery  and  resolves  itself  into  that  of  clerk.  Such 
cases,  however,  do  not  alw\iys  prevail,  as  on  some  lines  the 
various  departments  have  been  brought  to  see  the  advan- 
tage that  obtains  in  recognizing  the  purchasing  department 
as  the  department  to  conduct  from  the  initial  all  the  stages 
that  lead  up  to  the  conclusion  of  the  material  contracts. 
This  recognition  may  have  been  due  as  much  to  the  aggres- 
siveness of  the  purchasing  agent  as  to  the  co-operation  on 
the  part  of  the  management  at  large. 

The  following  excerpts  from  rules  and  regulations  in 
vogue  on  a  prominent  trunk  line  serve  to  bear  out  the 
writer ^s  remarks  on  the  importance  attached  to  the  pur- 
chasing department: 

I.  In  making  contracts  and  purchases  the  pur- 
chasing agent  will  be  guided  by  his  best  judg- 
ment, taking  into  consideration  quality,  prices 
and  the  recommendations  of  the  responsible 
heads  of  departments. 
n.  Negotiations  regarding  contracts  and  purchases 
and  the  correspondence  relating  thereto  will 
be  conducted  by  the  general  purchasing  agent; 
requests  for  infoiTnation  about  articles,  the 
use  of  which  may  be  contemplated,  will  be 
made  through  him. 
m.  Information  relating  to  quality  and  perform- 
ance of  materials,  supplies,  tools,  track  appli- 


256  EDWARD  NORTON  CHILSON 

ances,  etc.,  etc.,  will  be  furnished  to  outside 
parties  by  the  general  purchasing  agent  only, 
and  all  requests  for  information  made  by  such 
parties,  either  verbally  or  in  writing,  will  be 
referred  to  him. 
With  such  regulations  in  effect  there  is  little  or  no 
danger  of  friction  between  the  various  departments  as  re- 
gards their  material  requirements.     Railroads  would  do 
well  in  abolishing  systems  whereby  the  suppliers  are  al- 
lowed to  go  over  the  head  of  the  purchasing  agent  for  their 
information,  which  information,  if  given  directly  to  sup- 
pliers by  another  department  head,  might  serve  to  work 
contrary  to  the  understanding  had  with  the  supplier  by 
the  purchasing  agent. 

Department  officials  should  make  proper  requests  for 
materials  and  supplies  of  the  purchasing  agent,  and  where 
circumstances  warrant,  submit  recommendations;  but  be- 
yond this,  in  the  matter  of  purchases,  they  should  not  go. 
The  purchasing  agent  should  be  left  with  free  hands  for 
action,  accounting  only  to  his  superior. 

On  every  w^ell-organized  railroad  you  will  find  an  official 
in  charge  of  finance,  one  in  charge  of  operation,  another  in 
charge  of  traffic,  and  so  on,  and  their  sole  duties  lie  in  man- 
aging a  particular  and  well-defined  line  of  work.  So  there 
should  be  one  man  w^ho  stands  out  prominently  in  the  rail- 
road field  as  a  purchasing  officer,  whose  duties  should  em- 
brace all  those  that  bear  relation  to  the  purchase  of  ma- 
terials and  supplies. 

The  writer  has  covered,  in  his  judgment,  the  important 
points  with  regard  to  the  duties  of  the  purchasing  depart- 
ment. The  main  issues  have  been  touched  upon.  On  the 
whole,  the  field  might  be  referred  to  as  one  that  calls  for  the 
exercise  of  common  sense  and  business  acumen  and  the 
faithful  performance  of  duties,  and  the  encompassing  of 
a  system  capable  of  being  developed  and  enlarged  as  busi- 
ness goes  on  and  the  railroad  expands. 


THE  PROMOTER  IN  MODERN  BUSINESS. 

HARRISON  S.  SMALLEY. 

[Professor   of  Transportation,   University  of  Michigan.] 

A  promoter  is  one  who  inaugurates  a  business  enter- 
prise. The  enterprise  may  be  of  any  character,  and  may 
be  conducted  by  an  individual,  a  partnership,  or  a  corpora- 
tion. But  the  promoters  of  whom  we  hear  most  are  those 
who  give  the  corporate  form  of  organization  to  the  enter- 
prises which  they  establish. 

The  promotion  of  a  business  concern  is  not  the  simple 
matter  which  many  suppose.  It  is  a  complex  and  compli- 
cated task  which  in  many  cases  consumes  a  great  deal  of 
time,  necessitates  the  disbursement  of  a  not  inconsider- 
able sum  of  money,  requires  the  expenditures  of  much 
mental  and  physical  energy,  and  calls  for  the  exercise  of 
a  variety  of  talents.  For  the  work  of  promotion  begins 
when  the  project  has  just  been  conceived  as  an  idea  in 
some  one's  mind;  and  it  does  not  end  until  that  idea  has 
been  developed  and  worked  out,  and  has  taken  form  in 
an  actual  industrial  concern  which  is  established  and  ready 
for  business.  In  the  interval  many  steps  have  been  taken, 
some  with  the  greatest  patience  and  toil,  and  much  has  of 
necessity  been  accomplished. 

The  work  of  a  promoter  falls  into  three  main  divisions. 
His  first  task  is  to  satisfy  himself  that  a  business  oppor- 
tunity exists  which  is  worth  developing;  when  that  is  done 
he  must  fonnulate  a  proposition  with  reference  to  that 
opportunity,  working  out  all  of  its  features  in  detail;  and, 
finally,  he  must  interest  capital  in  his  i)rop()siti()n,  or  else 
undei'take  it  with  his  o\vri  funds,  thus  establishing  the 
enterprise  which  he  has  had  in  mind.  We  shall  discuss 
in  order  these  three  phases  of  a  promoter's  work. 

257 


258  HARRISON  S.  SMALLEY 

Considerations  of  the  Promoter. 

In  order  to  satisfy  himself  that  a  business  opportunity 
exists  which  is  worthy  of  exploitation,  the  conscientious 
promoter  must  examine  the  project  from  three  different 
points  of  view — the  technical,  the  commercial  and  the  legal. 
"WTien  considering  it  from  the  technical  point  of  view  the 
question  which  he  should  ask  himself  is  this  :  Is  the  scheme 
practicable;  or  are  there  mechanical,  chemical,  engineer- 
ing or  other  similar  obstacles  which  would  militate  against 
its  success?  In  many  cases,  such  as  the  promotion  of  a 
furniture  factory  or  general  merchandise  store,  this  ques- 
tion is  of  no  significance;  but  in  many  others,  it  is  of  con- 
sequence, and  occasionally  it  is  a  matter  of  vital  concern. 
This  is  especially  true  in  mining,  in  some  bridge,  tunnel, 
and  railway  enterprises,  and  in  propositions  involving 
newly  patented  articles  or  processes.  Hence,  at  this  in- 
itial point  in  the  promoter's  work  mistakes  of  judgment 
may  be  made  which  will  mean  the  utter  failure  of  the 
undertaking.  And  for  this  reason  all  careful  promoters 
consult  freely  with  technical  experts  and  do  not  proceed 
unless  their  judgment  is  favorable. 

Assuming  that  his  plan  appears  to  be  feasible,  the  pro- 
moter must  next  consider  it  from  the  commercial  point 
of  view,  giving  attention  to  the  important  question:  If 
such  a  concern  were  established  would  it  prove  profitable  ? 
To  answer  this  question  properly  involves  a  searching  in- 
vestigation into  all  the  multitudinous  factors  affecting  the 
cost  of  production,  the  selling  price,  and  present  and  future 
market  conditions.  He  must  not  only  consider  factory 
costs,  the  volume  of  present  production,  and  current  prices; 
he  must  reflect  upon  whatever  tendencies,  with  reference  to 
these  matters,  are  disclosed  by  the  records  of  recent  years. 
He  must  even  go  beyond  that  and  consider  the  matter  of 
raw  materials,  their  sources  and  abundance,  and  the  ex- 
tent to  which  they  have  passed  under  monopolistic  con- 


THE  PROMOTER  IN  MODERN  BUSINESS      259 

trol;  he  must  look  carct'ully  into  the  transportation  situ- 
ation, and  into  the  la])or  conditions;  and  nuist  detcnnine  to 
what  extent  the  market  for  this  ehiss  of  goods  lias  felt  or 
is  likely  to  feel  the  influence  of  the  monopoly  movement. 
His  A'iew  nnist  even  broaden  so  much  as  to  take  in  the 
trend  of  general  industrial  conditions.  It  would  he  im- 
possible to  enumerate  all  of  the  considerations  to  which 
he  must  give  weight,  but  the  few^  that  have  been  mentioned 
will  serve  to  convey  some  impression  of  the  arduous  and 
complicated  task  w^hich  at  this  stage  confronts  the  pro- 
moter. 

But  even  if  he  concludes  that  his  project  will  prove 
profitable  as  well  as  practicable  he  is  not  quite  ready  to 
proceed  with  it.  He  must  assume  a  third  viewpoint,  and 
consider  the  proposition  in  its  legal  aspects.  This,  of 
course,  involves  consultation  with  lawyers,  whose  services 
are  often  of  great  value.  If  the  enterprise  necessarily 
requires  the  use  of  certain  properties,  it  is  important  that 
careful  search  be  made  of  the  titles  to  such  properties, 
to  ascertain  whether  the  proposed  concern  can  secure  un- 
clouded rights.  If  its  success  depends  upon  the  employ- 
ment of  new  inventions,  their  patentability  should  be 
carefully  considered.  If  the  undertaking  involves  con- 
tracts with  certain  corporations,  it  must  be  deteiTnined 
that  contracts  of  the  kind  contemplated  are  within  the 
powers  of  the  corporations  concerned.  If  the  success  of 
the  enterprise  depends  to  any  important  extent  on  certain 
contracts,  the  promoter  should  demand  assurance  that 
those  contracts  are  not  in  violation  of  existing  law,  or  of 
proposed  legislation.  In  general,  the  legality  of  the  whole 
scheme  is  of  great,  and  sometimes  of  vital  importance, 
especially  in  these  days  of  anti-trust  legislation.  Still  an- 
other point  on  which  the  promoter  might  well  seek  legal 
advice  is  the  liability  to  public  regulation  of  a  concern 
such  as  he  has  in  mind.  This  is  an  era  in  which  the  Gov- 
ernment is  extending  its  controlling  arm  over  an  increas- 


260  HARRISON  S.  SMALLEY 

ingly  large  number  of  forms  of  business,  and  the  law  on 
the  subject  of  government  control  is  also  in  a  process  of 
evolution.  In  view  of  these  two  facts  advice  on  the  mat- 
ter of  public  regulation  is  sometimes  of  great  importance. 
These  illustrations  will  perhaps  sufficiently  enforce  the 
statement  that  it  is  frequently  necessary  for  the  promoter 
to  seek  the  aid  of  lawyers  in  examining  the  legal  aspects 
of  his  proposition. 

If,  when  all  is  done,  the  promoter  is  convinced  that 
his  project  is  feasible  and  legal  and  that  it  bids  fair  to  be 
profitable,  he  may  properly  proceed  to  develop  it.  But 
needless  to  say,  promoters  do  not  always  wait  to  be  thus 
convinced  before  going  on  with  their  plans.  Much  harm 
is  done  to  legitimate  business,  and  much  loss  inflicted  on 
investors,  by  promoters  who  carelessly  launch  enterprises 
mthout  sufficient  investigation  of  their  merits,  or  who 
deliberately  inveigle  persons  into  concerns  which  the  pro- 
motors  have  reason  to  suspect  are  doomed  to  failure.  Such 
promoters  are  a  menace  to  business  and  should  be  punished 
to  the  full  extent  of  the  law. 

Moreover,  it  should  be  noted  that  even  when  the  pro- 
moter is  painstaking  and  conscientious  in  examining  the 
various  features  of  his  project,  his  final  decision  may  not 
be  correct.  For  from  all  that  has  been  said  it  should  be 
evident  that  his  decision  cannot  be  reached  by  mathematic- 
al processes.  It  is  a  matter  of  discretion,  of  sagacity,  of 
sound  business  judgment.  Only  one  who  has  had  much 
experience,  who  has  true  business  instincts,  and  who  has 
some  measure  of  business  genius,  can  weigh  the  manifold 
considerations  which  present  themselves,  assign  its  proper 
weight  to  each,  and  at  last  derive  from  them  all  a  reliable 
conclusion. 

The  fact,  then,  that  a  promoter  has  been  diligent  and 
honest  in  his  work  is  no  guaranty  that  his  proposition  de- 
serves favorable  attention.  His  own  ability  to  judge  of  its 
merits  is  an  equally  important  consideration. 


THE  PROMOTER  IN  MODERN  BUSINESS     261 

Formulation  of  the  Scheme. 

ITa^^ng  satisfied  himself  that  the  ])i-oposed  enterprise 
is  one  which  ought  to  be  launched,  the  promoter  enters 
upon  the  second  part  of  his  task — the  formulation  of  the 
scheme  in  the  shape  of  a  definite,  complete  proposition, 
in  wliich  it  ma}-  be  possible  to  interest  persons  who  have 
money  to  invest.  The  drafting  of  such  a  plan  involves 
the  determination  of  all  the  essential  features  of  the  enter- 
prise. 

The  first  step  is  to  select  the  property  or  properties 
which  will  be  employed  in  the  business.  In  some  cases, 
for  example,  in  mining  propositions,  the  promoter  will 
have  chosen  the  property  before  he  reaches  this  point  in 
his  proceedings,  but  in  many  others  the  exact  site  of  the 
plant  may  not  be  determined  until  after  he  has  finished 
the  first  stage  in  his  work.  Needless  to  say,  much  depends 
upon  the  selection  of  properties,  and  serious  errors  may 
easily  be  made.  An  unfortunate  location  may  be  chosen; 
or  the  entei-prise  may  be  started  on  too  small  or  too  large 
a  scale;  or  the  properties  selected  may  not  have  all  the 
meritorious  qualities  attributed  to  them.  But  having 
solved  the  problem  and  picked  out  the  properties  whicli 
are  to  fonn  the  basis  of  his  proposition,  the  promoter  must 
next  determine  how  much  mone\',  beyond  that  needed  to 
buy  the  properties,  will  be  required  to  provide  such  build- 
ings, equipment  and  working  capital  as  may  be  necessary. 

At  this  point,  if  the  promoter  is  working  in  his  own 
behalf  and  ex])ects  to  become  the  sole  propi'ietor  of  the 
contemplated  l)usiness,  he  may  proceed  at  once  to  acquire 
the  property,  erect  the  necessary  structures,  purchase  the 
requisite  equipment  and  dedicate  to  the  undertaking  what- 
ever working  capital  is  required.  Tie  is  then  ready  to  ])e- 
gin  business,  and  the  work  of  promotion  is  completed. 

But  if,  on  the  other  hand,  he  intends  to  draw  others 
into  the  plan,  and  especially  if  he  intends  to  fonn  a  corpora- 


262  HARRISON  S.  SMALLEY 

tion  to  conduct  it,  he  must  take  other  steps  after  selecting 
the  properties  and  determining  the  amount  of  capital  re- 
quired. The  first  thing  which  he  must  do  is  to  bring  the 
chosen  property  within  his  control.  This  is  necessary  be- 
cause it  will  take  some  time  for  him  to  interest  others  in 
the  scheme,  and  meanwhile  the  property  may  pass  into 
the  hands  of  persons  who  will  not  part  with  it  except  at 
an  impossible  figure.  Moreover,  investors  will  hardly 
listen  to  his  solicitations  unless  he  can  assure  them  that 
they  can  have  the  property  at  a  certain  price.  For  these 
reasons  he  must  either  purchase  the  property  outright,  or 
must  secure  an  option  upon  it,  which  will  give  him  the  privi- 
lege of  buying  the  property  at  a  stated  price,  on  any  day 
within  a  certain  fixed  limit  of  time.  He  will  usually  choose 
the  latter  alternative,  for  a  direct  purchase  involves  con- 
siderable capital,  while  an  option  can  often  be  procured 
for  a  nominal  consideration. 

If  now,  the  promoter  is  planning  to  have  the  business 
conducted  by  a  partnership,  he  is  in  a  position  to  go  to  va- 
rious persons,  present  the  proposition  to  them,  and  en- 
deavor to  interest  them  in  it.  If  he  succeeds  a  firm  will 
be  formed,  the  members  will  contribute  the  necessary  cap- 
ital, and  will  take  off  his  hands  the  property  which  he  has 
purchased  or  optioned,  compensating  him  for  his  labor  and 
expense  in  connection  with  the  enterprise.  His  work  as 
promoter  will  then  be  finished,  and  the  firm  will  proceed 
to  begin  operations,  after  doing  whatever  is  necessary  in 
the  way  of  adding  buildings  or  equipment  to  the  property. 

But  if,  again,  the  promoter  is  contemplating  the  cor- 
porate form  of  organization  not  a  little  remains  to  be  done, 
after  securing  control  of  the  property,  before  he  can  make 
his  appeal  to  investors. 

In  the  first  place,  he  must  select  the  state  in  which  to 
form  the  corporation.  At  first  blush  it  might  seem  natural 
for  him  to  incorporate  in  the  state  where  the  business  is 
to  be  located;  but  on  the  contrary,  there  are  considerations 


THE  PROMOTER  IN  MODERN  BUSINESS      263 

which  often  lead  him  to  go  elsewhere  for  his  charter.  He 
is  at  li])erty  to  incorporate  wherever  he  pleases,  for  it  is 
the  almost  invariable  practice  of  our  states  to  admit  freely 
the  corporations  formed  by  all  the  other  states;  and,  in- 
deed, no  state  can  prevent  an  outside  corporation  from 
engas^ing  in  interstate  commerce  within  its  borders.  The 
promoter,  therefore,  can  resort  to  the  state  which  offers 
the  most  attractive  inducements.  Now  the  policies  of  our 
states  differ  widely  in  the  matter  of  incorporation.  Some 
states  have  laws  which  are  ''strict";  others  have  laws 
which  are  ''liberal."  Some  exact  high  incorporation  fees 
and  annual  franchise  taxes,  while  others  have  reduced 
their  charges  to  a  merely  nominal  amoimt,  many  states, 
in  fact,  imposing  no  annual  tax  at  all.  Promoters,  there- 
fore, naturally  gi'avitate  to  certain  states.  They  tend  to 
go  where  fees  and  taxes  are  low  and  where  "liberal"  laws 
are  held  out  as  an  inducement.  Indeed,  certain  states  have 
made  incorporation  by  outsiders  so  simple,  easy  and  inex- 
pensive, and  have  also  offered  so  many  other  attractions, 
that  each  of  them  annually  creates  many  corporations 
which  are  not  designed  to  transact  any  business  at  all  with- 
in the  state  of  their  birth. 

Unfortunately  the  "inducements"  offered  by  the  "lib- 
eral" laws  of  these  states  are  chiefly  such  as  to  appeal 
most  strongly  to  the  worst  types  of  promoter — those  who 
are  endeavoring  to  foist  upon  the  public  some  visionary, 
or  fraudulent,  or  inflated  proposition.  Such  laws  make 
it  possible  for  a  corporation  to  begin  operations — to  ne- 
gotiate contracts  and  to  incur  debts — without  a  dollar  of 
property  or  a  cent  in  cash;  they  make  it  possible  for  the 
promoter  to  offer  for  sale  at  one  cent,  or  at  any  other  price, 
shares  of  stock  with  a  par  value  of  one  dollar,  such  shares 
of  stock  being  legally  regarded  as  "fully  paid";  they  make 
it  possible  for  a  cnr]K)ration  to  advertise  that  it  has  a  capital 
stock  of  $10,000,000  ''fully  paid  up,"  when  in  point  of  fact 
not  a  cent  in  money  or  even  in  propei^ty  has  ever  been  re- 


264  HARRISON  S.  SMALLEY 

ceived  for  the  stock;  and  thus  they  allow  an  unlimited 
amount  of  stock-watering  and  overcapitalization,  with  the 
invariable  profits  to  those  on  the  inside,  and  corresponding 
losses  to  those  on  the  outside — opening  the  way,  among 
other  things,  to  the  taking  of  excessive  compensations  by 
promoters.  They  also  pemiit  a  corporation  to  own  the 
stock  of  other  companies  without  limitation,  thereby  mak- 
ing easy  the  formation  of  monopolistic  combinations,  and 
they  furthermore  make  it  possible  for  those  in  control  of 
a  corporation  to  oppress  and  virtually  defraud  the  smaller 
stockholders,  with  entire  impunity.  These  are  some  but 
not  by  any  means  all  of  the  ''attractions"  offered  by  some 
of  our  states  to  outside  incorporators.  New  Jersey  at 
once  suggests  itself  to  the  mind  as  the  state  which  has  led 
in  this  matter;  but  other  states  are  now  to  be  classed  with 
it.  Maine,  Massachusetts,  Connecticut,  New  York,  Dela- 
ware, the  District  of  Columbia,  Virginia,  West  Virginia, 
South  Dakota,  Arizona  and  Nevada  have  all  gone  too  far 
in  "liberalizing"  their  corporation  laws. 

The  promoter,  therefore,  instead  of  finding  it  easy  to 
select  the  state  of  incorporation,  is  confronted  by  so  many 
rival  attractions,  and  beset  by  so  many  temptations  that 
he  is  often  wholly  bewildered.  He  naturally  wants  to  go 
where  incorporation  will  prove  cheapest,  and  if  there  is 
anything  shady  about  his  proj)Osition,  or  if  he  is  ambitious 
to  reap  an  excessive  personal  profit  from  his  transaction, 
the  liberal  states  present  compelling  allurements.  In  the 
end  he  must  decide  upon  some  one  state ;  and  it  is  a  matter 
of  regret  that  so  many  promoters  go  to  the  states  whose 
laws  afford  the  ordinary  investors  no  protection  against 
the  cupidity  of  the  promoter  or  the  dishonesty  of  corpo- 
rate managers. 

Having  selected  the  state  of  incorporation  the  promot- 
er's next  step  is  to  determine  the  capitalization  of  the  pro- 
jected corporation,  that  is,  the  amount  of  stocks  and  bonds 
to  be  issued,  for  the  capitalization  of  a  corporation  is  the 


THE  PROMOTER  IN  MODERN  BUSINESS      265 

sum  of  the  par  values  of  all  the  outstanding  stocks  and 
bonds. 

There  are  several  theories  as  to  the  proper  capitaliza- 
tion of  corporations,  but  they  all  group  themselves  about 
two  ideas.  One  idea  is  that  capitalization  should  equal 
tlie  cost  or  value  of  the  property;  the  other,  that  it  should 
be  based  upon  the  earnings  of  the  company,  that  it  should, 
in  fact,  be  nothing  more  or  less  than  the  capitalization 
of  the  eaniings  at  some  selected  rate  per  cent. 

If  the  promoter  adopts  the  first  idea— which  is  the 
more  conservative  one — his  task  will  be  relatively  easy. 
In  forming  the  corporation  he  will  provide  for  the  imme- 
diate issue  of  securities  with  total  par  values  just  equal 
to  the  sum  needed  for  the  inauguration  of  the  enterprise, 
that  is,  a  sum  sufficient  to  cover  the  price  of  the  selected 
property,  the  cost  of  desirable  structures  and  equipment, 
the  amount  needed  for  working  capital,  and  a  reasonable 
compensation  for  himself.  But  as  a  matter  of  fact  the 
promoter  is  usually  tempted  to  accept  the  second  idea — 
to  base  the  capitalization  on  prospective  earnings.  And 
as  soon  as  he  undertakes  to  estimate  prospective  eara- 
ings  his  enthusiasm  and  his  cupidity  run  away  with  him; 
and  he  forms  an  estimate  of  earnings  which  is  altogether 
too  high,  and  the  resulting  capitalization  is  correspond- 
ingly excessive.    In  brief,  he  is  tempted  to  overcapitalize. 

This  temptation  is  due  in  part  to  his  desire  for  as  large 
a  personal  profit  as  possible.  It  is  easy  for  him  to  add  to 
the  proper  capitalization  a  few  thousand  shares  of  stock 
and  appropriate  them  as  a  part  of  his  compensation.  So 
long  as  the  additional  securities  thus  issued  are  not  pre- 
posterous in  amount,  they  are  not  likely  to  endanger  his 
success.  Another  motive  is  his  anxiety  to  sell  his  securities. 
It  may  be  that  there  is  some  weak  spot  in  his  ]ii-oject  whieh 
will  cause  true  investors  to  beware  of  it.  In  such  a  case  he 
can  inflate  the  capitalization  and  so  offer  the  temptation 
of  cheap  stock  to  persons  of  a  speculative  l)ent. 


266  HARRISON  S.  SMALLEY 

The  impulse  to  base  capitalization  on  earnings,  rather 
than  on  cost,  is  especially  strong  when  a  promoter  is  not 
starting  a  new  entei'prise  but  is  simply  forming  a  corpora- 
tion to  take  over  one  or  more  going  concerns.  In  such  a 
case  the  books  of  the  several  concerns  show  their  records 
of  earnings,  and  if  those  records  go  back  far  enough  and 
cover  bad  years  as  well  as  good,  a  capitalization  based  on 
the  average  earnings  thus  disclosed  would  be  fairly  con- 
servative. But  here,  again,  there  is  the  same  temptation 
to  issue  an  excessive  amount  of  securities.  A  striking 
illustration  of  this  may  be  found  in  the  procedure  of  most 
of  the  promoters  who  effected  the  great  consolidations 
kne^Ti  as  trusts.  Usually  the  record  of  earnings  consid- 
ered by  the  promoter  covered  only  a  year  or  two  of  pros- 
perous times.  Even  so,  however,  he  was  not  content  with 
a  capitalization  based  on  the  earnings  thus  disclosed,  but 
formed  an  estimate — usually  extravagant — of  additional 
earnings  which  were  to  come  as  a  result  of  the  consolida- 
tion; and  those  visionary  earnings  he  also  capitalized. 
There  was  present  here  the  added  motive  of  issuing  enough 
stock  to  satisfy  all  the  owners  of  the  several  concerns  and 
so  induce  them  to  come  into  the  consolidation.  The  result 
w^as  that  most  of  the  trusts  were  floated  in  a  sadly  over- 
capitalized condition. 

Beset,  then,  by  the  temptation  to  issue  too  many  securi- 
ties, the  promoter  must  fix  the  capitalization  of  his  corpora- 
tion. In  doing  so,  however,  he  finds  it  necessary  to  take 
into  consideration  another  matter — the  various  kinds  of 
securities  which  his  projected  corporation  is  to  issue.  This 
also  is  a  question  of  some  difficulty.  Stocks  are  of  two 
kinds,  common  and  preferred,  and  preferred  stock  is 
sometimes  of  two  sorts,  first  and  second  preferred.  Bonds 
also  fall  into  two  classes — ^mortgage  bonds  and  non-mort- 
gage, or  ''plain,"  bonds — and  there  are  many  kinds  of 
mortgage  bonds.  Now  each  species  of  stock  and  bond  has 
its  own  peculiarities  and  is  designed  for  certain  particular 


THE  PROMOTER  IN  MODERN  BUSINESS      267 

uses.  And  therefore  from  the  loni^  list  of  dilTcrcnt  kinds 
of  securities  the  promoter  is  oblijjjed  to  select  those  which 
seem  best  adapted  to  the  needs  of  his  own  proposition. 

The  promoter  must  next  attend  to  certain  matters  which 
are  not  likely  to  prove  so  difficult.  He  must  choose  a  name 
for  his  corporation,  must  select  the  persons  who  are  to  act 
as  incorporators,  must  also  decide  upon  the  members  of 
the  first  board  of  directors,  and  must  determine  upon  a 
place  for  the  location  of  the  corporation's  lethal  office  in 
the  state  of  incorporation.  In  deciding  all  these  matters 
he  must  comply  with  the  requirements  of  the  statutes  in 
the  state  which  he  has  chosen  as  the  home  of  the  corpora- 
tion; and  he  must  also  determine  any  other  questions  which 
those  statutes  make  it  necessary  to  consider. 

The  promoter  is  then,  at  last,  in  a  position  to  give  final 
form  to  his  proposition  by  actually  forming  the  projected 
coiporation.  On  the  surface  the  process  of  forming  a  cor- 
poration is  a  simple  one.  A  document  must  first  be  drawn 
up  setting  forth  certain  essential  facts  regarding  the  pro- 
posed corporation.  Blanks  for  this  purpose  are  usually 
furnished  by  the  state.  Tliis  document,  known  generally 
by  the  name  of  "articles  of  association,"  must  be  signed 
and  acknowledged  by  the  incorporators,  and  then  filed 
with  the  secretary  of  state  or  some  other  public  officer. 
At  the  same  time  certain  prescribed  fees  must  be  paid. 
The  cori^oration  -is  thus  brought  into  existence,  and  the 
incorporators  may  meet  at  once  and,  as  members  of  the 
corporation,  begin  their  contemplated  activities.  In  most 
states  this  is  all  that  need  be  done  to  fonn  a  corporation. 

Yet  the  process  is  not  always  as  simple  as  it  seems.  In 
large  corporations,  with  complicated  affairs  involving  very 
important  interests,  the  drafting  of  the  articles  of  asso- 
ciation in  such  a  manner  as  to  accomplish  the  desired  ends 
and  at  the  same  time  avoid  all  legal  pitfalls  becomes  a 
matter  of  great  delicacy  and  no  little  difficulty.  It  is  also 
of  the  greatest  importance  that  the  initial  meeting  shall 


'2m  HARRISON  S.  SMALLEY 

be  so  conducted  as  to  launch  the  corporation  in  just  the 
way  contemplated  by  the  promoter,  and  yet  that  its  pro- 
ceedings shall  be  in  full  harmony  with  all  legal  require- 
ments. In  fact,  every  step  involves  so  many  possibilities 
of  legal  complications  that  often  the  promoter  employs  a 
lawyer  who  is  expert  in  corporation  practice,  and  turns 
over  to  him  the  entire  task  of  forming  the  corporation. 

It  might  seem  that  a  special  difficulty  would  confront 
a  promoter  who  had  decided  to  incorporate  in  some  other 
state,  on  account  of  the  distance  he  would  have  to  travel 
to  perfect  his  incorporation;  but  this  is  not  often  the  case. 
In  most,  if  not  all  of  the  states  which  have  liberalized  their 
laws,  concerns  have  sprung  up  which  make  it  their  busi- 
ness to  attend  to  incorporations  for  outside  parties.  Need- 
less to  say,  some  of  them  are  reliable  and  some  are  not, 
but  those  which  are  trustworthy  prove  a  great  convenience 
to  outside  incorporators.  They  are  thoroughly  familiar 
with  the  laws  of  the  state,  and  so  can  properly  conduct  the 
necessary  proceedings.  Moreover,  if  the  statute  specifies 
that  one  of  the  incorporators  must  be  a  resident  of  the 
state — which  is  usually  the  case — such  a  concern  supplies 
a  local  ''dummy"  to  serve  the  purpose.  If,  furthermore, 
the  statute  provides  that  one  or  more  directors  must  be 
residents  of  the  state,  and  that  the  corporation  must  keep 
a  resident  agent  within  the  state,  the  concern  provides 
dummies  to  fill  these  positions.  And  since  statutes  also 
require  that  each  corporation  maintain  a  local  office  within 
the  state,  such  a  concern  offers  its  ovm.  quarters  as  the  lo- 
cation of  that  office.  For  these  and  sometimes  other  serv- 
ices a  compensation  is  charged  which  is  usually  moderate 
in  comparison  with  their  value  to  outside  parties. 

It  must  not  be  supposed  that  the  use  of  dummies  is 
confined  to  cases  in  which  they  serve  as  an  accommodation 
to  persons  residing  at  a  distance.  They  are  often  used 
simply  to  conceal  the  real  parties  in  interest,  when  those 
parties,  for  some  reason  not  usually  commendable,  do  not 


THE  PROMOTER  IN  MODERN  BUSINESS      269 

wish  to  have  their  conncctiou  with  the.'  cuterprise  generally 
known. 

''Floating"  the  Proposition. 

Having  actually  brought  his  corporation  into  existence 
the  jn-onioter  has  coiu]i]rte(l  the  second  main  division  of 
his  work.  He  has  fornudated  a  plan  and  nuist  now  under- 
take the  third  part  of  his  task,  which  consists  in  "floating" 
his  proposition.  That  is,  he  must  interest  outside  persons 
in  the  scheme,  must  dispose  of  the  securities  to  them,  and 
then  must  turn  over  the  enterprise  to  the  stockholders, 
who  thenceforth  will  control  its  destiny. 

At  the  outset  the  promoter  must  devote  himself  to  the 
preparation  of  a  prospectus.  It  is  very  difficult  to  define 
a  prospectus,  because  it  presents  different  aspects,  de- 
pending upon  the  point  of  \dew  from  which  it  is  regarded. 
From  the  standpoint  of  the  promoter  it  is  an  advertise- 
ment of  the  securities  of  his  corporation;  and  inasmuch  as 
he  thinks  of  it  in  that  way  he  naturally  gets  it  up  in  such 
a  manner  as  to  make  it  an  effective  advertisement.  He 
wishes  it  to  succeed  in  inducing  people  to  buy  his  stocks 
and  bonds,  and  hence  he  makes  it  just  as  convincing  and 
just  as  alluring  as  he  can.  Unless  he  is  the  possessor  of 
an  exceptional  conscience,  he  tends  to  omit  all  references 
to  the  imt'avorable  aspects  of  his  proposition,  and  to  lay 
great  stress  upon  its  more  attractive  features.  He  even 
finds  himself  painting  a  rosy  picture  of  the  future  of  the 
corporation,  and  arousing  the  cupidity  of  prospective  in- 
vestors by  holding  out  to  them  the  hope  of  enormous  profits. 
Some  promoters,  especially  of  the  cheaper  propositions,  go 
even  farther  and  adopt  what  thov  deem  to  be  f-lever  ad- 
vertising methods  and  expedients,  which  are  surprisingly 
effective  with  the  less  sopliisticated  classes  of  persons. 
Still  others,  on  the  contrary,  assume  an  air  of  great  dig- 
nity and  present  a  very  businesslike  and  imposing  doeu- 
ment,  which  looks  reliable  but  may  be  just  as  treacherous 


270  HARRISON  S.  SMALLEY 

as  the  most  extravagant  and  visionary  variety.  In  short, 
so  long  as  the  prospectus  is  looked  upon  as  an  advertise- 
ment it  will  naturally  take  whatever  form,  and  be  given 
whatever  tone  and  air,  the  particular  promoter  believes 
will  appeal  most  strongly  to  the  class  of  persons  he  in- 
tends to  approach. 

But  from  the  point  of  view  of  the  prospective  investor 
the  prospectus  is  not  merely  an  advertisement.  It  is  the 
chief  and  sometimes  the  only  medium  through  w^hich  he 
can  gain  an  impression  of  the  proposition.  If  it  is  inade- 
quate and  delusive  and  beguiling,  he  may  invest  his  money 
and  presently  find  himself  a  heavy  loser.  While,  then, 
the  promoter  is  allowed  by  our  ''liberal"  laws  to  draft  any 
sort  of  prospectus  that  he  wishes,  a  decent  regard  for  the 
moral  obligation  which  he  owes  to  the  investing  public 
would  lead  him  to  make  his  prospectus  truthful  and  com- 
plete. Indeed,  it  may  be  remarked,  there  is  need  for  laws 
under  which  no  prospectus  could  be  issued  which  did  not 
truthfully  disclose  all  of  the  facts  required  for  the  forma- 
tion of  a  sound  investment  judgment. 

Armed  with  his  prospectus  the  promoter  must  next 
proceed  to  sell  his  securities,  except  such  as  are  to  be 
issued  directly  in  exchange  for  the  property  which  the 
corporation  is  to  acquire.  There  are  various  ways  in  which 
securities  may  be  sold.  In  small  concerns,  especially  if 
they  are  of  local  character,  such  as  a  factory  to  be  owned 
by  the  residents  of  the  town  where  it  is  located,  the  com- 
mon and  also  the  cheapest  method  of  selling  the  stock  is 
through  personal  solicitation.  But  that  method  is  imprac- 
ticable in  other  small  concerns,  manufacturing  and  other- 
wise, which  are  so  situated  that  they  must  appeal  to  a 
wider  investing  public,  or  which  by  their  very  nature  must 
collect  their  capital  from  scattered  sources,  which  is  the 
case  with  many  mining  and  similar  enterprises.  In  such 
situations  the  promoter  sometimes  attempts  solicitation 
by  correspondence,  getting  the  names  of  his  correspond- 


THE  PROMOTER  IN  MODERN  BUSINESS      271 

ents  from  replies  to  advertiseineuts,  or  from  the  jiriuted 
list  of  names  and  addresses  which  are  in  common  circula- 
tion in  the  business  world.  Often,  however,  he  engages  the 
ser\'ices  of  one  or  more  agents,  who  endeavor  to  sell 
his  stock  for  a  connnission,  or  on  some  other  basis.  There 
are  many  individuals  and  concerns  throughout  the  coun- 
try which  make  it  a  business  to  act  as  agent  in  this  capa- 
city. Such  individuals  or  concerns  usually  advertise  them- 
selves as  brokers,  or  stock  brokers,  or  *' bankers,"  or  fiscal 
agents,  or  finance  companies,  or  securities  companies.  Some 
of  them  handle  only  high-grade  securities  and  deservedly 
enjoy  an  excellent  reputation.  Unfortunately,  however, 
the  majority  are  not  of  that  type. 

Still  another  method  of  disposing  of  securities,  and  the 
one  most  commonly  used  in  connection  with  large  corpora- 
tions, is  underwriting.  Underwriting  is  the  guaranteeing 
of  the  sale  of  stocks  or  bonds.  Sometimes  a  single  banker 
or  banking  house  will  underwrite  an  entire  issue,  but  more 
commonly  a  group  of  bankers  kno^^^l  as  an  underwriting 
syndicate  is  fonned,  under  the  leadership  of  one  who  is 
known  as  the  syndicate  manager.  As  sometimes  arranged, 
each  member  of  the  syndicate  agrees  to  take  at  a  fixed 
price  a  certain  portion  of  all  the  securities  remaining  un- 
sold at  specified  date,  and  for  this  promise  he  receives  a 
consideration  in  money  or  stock.  In  other  cases  the  mem- 
bers of  the  syndicate  virtually  buy  the  securities  and  pay 
a  stipulated  price,  usually  borrowing  money  for  the  pur- 
pose. The  manager  then  attempts  to  negotiate  the  sale 
of  the  securities,  but  if  at  the  expiration  of  an  agreed  pe- 
riod any  remain  imsold  they  are  distributed  among  the 
membei-s  in  a  fixed  proportion.  The  syndicate's  compensa- 
tion for  this  service  consists  in  the  difference  between  the 
purchase  and  selling  prices,  though  frequently  bonuses  of 
stock  are  also  given  especially  to  the  syndicate  manager. 

In  one  way  or  another,  then,  the  promoter  sells,  or  ar- 
ranges for  the  sale  of  the  securities,  and  thus  provides  the 


272  HARRISON  S.  SMALLEY 

corporation  with  the  needed  capital.  Of  course,  if  his  plan 
develops  serious  defects,  or  if  he  happens  to  bring  it  out 
at  a  time  of  financial  unrest  or  industrial  depression,  he 
may  fail  to  dispose  of  the  securities,  and  in  consequence 
his  scheme  may  fall  through  entirely  or  its  realization  may 
be  postponed  for  a  long  time.  But  in  good  times  the  pro- 
moter of  a  really  worthy  enterprise  has  no  serious  difficulty 
in  gaining  an  audience  among  people  with  money  to  invest. 
Moreover,  in  times  of  prosperity,  the  promoter  with  a 
proposition  so  risky  that  real  investors  look  askance  at  it, 
can  often  find  speculators  who  are  willing  to  listen  to  him. 
Having  sold  the  stock  and  thus  placed  the  corporation 
in  the  hands  of  those  who  are  to  control  it,  the  work  of  the 
promoter  is  almost  finished.  But  one  thing  further  is  nec- 
essary. If  he  has  not  already  done  so,  he  must  transfer  to 
the  corporation  the  properties  which  he  previously  pur- 
chased or  optioned  with  the  intention  of  holding  them  for 
the  use  of  the  contemplated  corporation. 

The  promotion  is  now  complete.  The  idea  which  the 
promoter  originally  entertained,  and  which  at  first  was  a 
mere  idea,  has  borne  substantial  fruit — a  fully  organized 
corporation  has  been  established,  with  the  property  and 
capital  needed  to  conduct  the  enterprise  which  the  pro- 
moter has  had  in  mind. 

Usefulness  of  the  Promoter. 

From  all  that  has  been  said  it  is  plain  that  the  pro- 
moter's task  is  many-sided,  and  that  it  is  difficult  and 
laborious.  It  should  also  be  evident  that  his  activities  are 
necessary  in  any  growing  community.  Yet  many  persons 
manifest  a  disposition  to  look  upon  the  promoter  as  a  use- 
less encumbrance,  in  fact  as  something  worse  than  that — 
a  leech,  a  parasite  on  legitimate  business,  performing  no 
real  service,  but  getting  a  living  out  of  the  rest  of  the  peo- 
ple. That  this  is  a  mistaken  view  should  now  be  clear. 
The  work  which  he  does  is  not  useless;  it  is  indispensable 


THE  PROMOTER  IN  MODERN  BUSINESS      273 

if  busiiK'sy  is  really  to  jn'ogress.  It'  industry  is  to  develop, 
if  the  number  of  business  concerns  is  to  increase,  promo- 
tions must  constantly  be  undertaken.  No  })lant  or  busi- 
ness house,  small  or  large,  can  be  established  without  first 
being  promoted. 

Tlie  misconception  Avhich  exists  with  reference  to  this 
subject  has  probably  arisen  from  the  fact  that  in  many 
cases  i^romoters  are  merely  promoters,  and  do  not  expect 
to  be  actively  connected  with  their  enterprises  after  their 
work  as  promoters  is  finished.  In  practice  this  is  a  matter 
of  ver}^  highest  importance.  If  one  is  promoting  a  busi- 
ness in  which  he  expects  to  invest  funds  of  his  own,  and 
so  to  become  sole  o\Maer,  or  at  any  rate  part  owner,  his 
conduct  as  promoter  will  naturally  be  characterized  by 
honesty,  sincerity  and  thoroughness.  But  if  one  is  start- 
ing an  enterprise  in  which  he  does  not  plan  to  invest  any 
mone}^  but  which  he  ex])ects  to  turn  over  to  others  as  soon 
as  possible,  taking  from  them  a  compensation  for  his  labors, 
there  is  not  the  same  incentive  to  exemplary  behavior  as 
a  promoter.  On  the  contrary,  he  is  su1)jected  to  the  temp- 
tation to  make  everything  he  can  out  of  the  transaction, 
even  if  at  the  expense  of  those  whom  he  draws  into  the 
plan.  And  he  is  furthermore  encouraged  to  yield  to  this 
temptation  by  incorporation  laws  which  make  it  easy  for 
him  to  prey  upon  the  investing  and  speculating  public. 
A  promoter  is  often  al)le  to  sell  the  securities  of  a  corpora- 
tion which  is  an  absolute  fraud,  or  which  is  so  visionary 
or  risky  that  no  one  with  a  true  understanding  of  the  enter- 
prise would  for  a  moment  have  anything  to  do  with  it.  Tie 
is  enabled  to  do  this  by  laws  which  in  no  way  control  his 
prospectus,  which  allow  him  the  greatest  li])erty  in  mak- 
ing his  approach  to  his  victims,  and  wliidi  impose  no  ade- 
(|unte  penalties  to  deter  him  from  conduct  which  is  vir- 
tually if  not  legally  dishonest;  laws,  moreover,  which  make 
it  possible  for  him  to  offer  "full  paid"  stock  at  a  trivial 
fraction  of  its  par  value,  in  this  and  other  ways  appealing 


274  HARRISON  S.  SMALLEY 

to  the  cupidity  of  the  people  and  to  that  thirst  for  sudden 
wealth  which  is  so  common  a  feature  of  human  nature. 

Furthermore,  even  w^hen  the  promoter  is  floating  a 
meritorious  proposition,  he  is  able  to  cheat  those  who  pur- 
chase his  securities  by  taking  for  himself  an  altogether 
unreasonable  and  exorbitant  compensation.  After  the 
corporation  is  formed  he  can  easily  retain  control  over  it, 
through  the  agency  of  dummy  directors,  for  at  least  a  brief 
period,  during  which  time  he  may  have  issued  to  himself  an 
excessive  amount  of  stock,  or  may  transfer  to  the  corpora- 
tion the  property  he  has  bought  or  optioned,  at  a  figure 
in  excess  of  the  purchase  or  option  price,  or  he  may  do 
both  of  these  things.  It  is  true  that  the  law  does  not  look 
with  favor  on  such  transactions,  but  in  the  vast  majority 
of  cases  the  law  as  it  now  stands  is  powerless  to  prevent 
them;  and,  moreover,  the  statutes  of  our  ''liberal"  states 
actually  encourage  them  by  permitting  the  promoter  to 
overcapitalize  at  will. 

Of  course  the  promoter  is  entitled  to  receive  a  sub- 
stantial sum  from  the  corporation.  He  clearly  has  a  right 
to  be  reimbursed  for  money  necessarily  expended  for  cleri- 
cal help,  expert  and  legal  counsel,  traveling  expenses,  in- 
corporation fees,  printing  and  postage,  and  the  like,  with 
interest  at  a  reasonable  rate.  He  can  also  justly  claim  a 
fair  remuneration  for  his  own  work,  and  in  addition  is  en- 
titled to  a  reasonable  compensation  for  his  initiative  and 
for  the  risk  involved  in  undertaking  the  project — the  risk 
that  the  promotion  might  fail  and  his  effort  and  money 
be  thrown  away  in  consequence.  But  while  frankly  ac- 
knowledging his  just  deserts,  and  while  realizing  that  some 
promoters  are  inadequately  remunerated,  we  must  also 
recognize  that  many  others  receive  grossly  exorbitant  com- 
pensations, and  that  our  existing  laws,  as  well  as  commer- 
cial conditions,  make  such  things  possible. 

But  whatever  criticisms  may  be  brought  against  the 
practices  of  many  promoters — and  those  which  may  justly; 


THE  PROMOTER  VJ  MODERN  BUSINESS      275 

be  brought  are  many  and  serious — it  nuust  not  be  for- 
gotten that  promotion  is  useful,  and  in  truth  essential  to 
industrial  2^i'<>gi'^'ss.  Some,  indeed,  while  admitting  that 
promotion  is  in  itself  a  good  thing,  may  nevertheless  main- 
tain that  the  promoter  who  simply  starts  an  enterprise 
and  then  abandons  it  to  others  as  soon  as  he  can  enlist 
their  interest,  is  of  an  objectionable  type;  that  only  those 
persons  should  promote  who  expect  to  maintain  perma- 
nently, or  at  least  for  some  time,  an  active  interest  in  the 
concerns  which  they  establish.  There  is  doubtless  some 
force  in  this  contention.  Nevertheless,  it  is  in  all  prob- 
ability desirable  that  there  should  be  persons  who  are 
merely  promoters.  There  are  some  men  who  have  a  pe- 
culiar talent  for  just  that  sort  of  work,  and  who  can  best 
benefit  the  community  by  exercising  that  talent.  ^lore- 
over,  the  great  majority  of  men  who  have  surplus  funds 
to  invest  are  so  engrossed  in  their  respective  vocations 
that  they  have  little  time  or  effort  to  spare  in  hunting  up 
new  investment  opportunities.  The  wide-awake  promoter 
performs  a  real  service  in  locating  and  formulating  oppor- 
tunities for  them.  Sound  policy,  therefore,  does  not  seem 
to  lie  in  the  direction  of  attempting  to  abolish  the  promoter 
— even  the  mere  promoter.  On  the  contrary,  what  is 
needed  is  a  revision  of  our  laws  with  the  purpose  of  so 
regulating  the  conduct  of  the  promoter  that  the  abuses 
which  have  long  been  connected  with  his  activities  will 
be  restrained  or  abolished. 


THE  FINANCIERING  OF  TRUSTS.* 

BY  HON.  CHARLES  S.  FAIRCHILD. 

[Formerly  Secretary  of  the  Treasury.] 

The  subject  that  I  have  been  asked  to  present— "The 
Financiering  of  Trusts" — is  one  as  to  which  there  is,  prob- 
ably, much  confusion  in  the  minds  of  many  people.  But 
it  is  so  simple  and  the  process  is  so  obviously  the  one  that 
must  be  followed  that  I  am  doubtful  if  I  can  worthily  take 
any  of  your  time. 

The  motives  and  the  processes  which  produce  a  cheese 
factory  or  creamery  are  much  the  same  as  those  which 
produce  other  business  combinations  or  so-called  trusts. 
A,  B,  C,  D,  and  E  own  dairy  farms;  they  become  satisfied 
in  some  way  that  they  can  manufacture  and  sell  butter 
and  cheese  at  greater  advantage  if  they  combine  both  for 
manufacture  and  sale  than  they  can  if  they  continue  in 
the  old  way  on  each  individual  farm. 

They  may  reach  this  conclusion  through  the  talk  of 
some  man  who  wishes  the  job  of  managing  the  manufac- 
tory or  by  talk  among  themselves.  In  the  one  case  there 
is  a  promoter;  in  the  other,  not. 

But  coming  to  my  immediate  subject,  owing  to  the  fact 
that  usually  the  things  which  we  have  in  mind  now  are 
made  by  the  union,  under  a  new  corporation,  of  private 
concerns  and  of  corporations  more  or  less  widely  separated 
geographically,  and  because  there  are  laws  about  corpo- 
rations that  must  be  complied  with  or  evaded,  some  things 
are  done  in  their  financiering  which  make  apparent  dif- 
ferences between  them  and  the  familiar  cases  of  which  I 
have  spoken.  But  the  difference  is  more  apparent  than 
real,  as  will  appear  when  both  are  well  understood. 

*  Courtesy  of  the  American  Economic  Association. 

276 


THE  FINANCIERING  OF  TRUSTS  277 

Several  iiiaiiiiracturers  whose  i'aclorics  arc  in  as  many 
clifforont  places  come  to  believe  that  it  is  for  their  ad- 
vantage to  miite  llicir  vari(ms  businesses:  tliey  consult  as 
to  the  value  of  their  respective  real  estate,  tools,  machinery 
and  business  connections;  then  they  organize  a  corporation 
under  some  state  where  the  laws  are  suita])le  for  their  pur- 
lX)se,  providing  for  a  maximum  of  securities  of  various 
kinds,  mortgage  bonds,  preferred  and  common  stock — all 
or  any  of  these  as  they  may  determine — and  then  sell  their 
properties  to  the  new  corporation,  taking  in  pa>Tnent  the 
securities  of  the  new^  corporation  in  such  proportions  as 
the  value  of  each  property  is  to  the  value  of  all  of  them. 

Or  in  another  case  the  promoter  acts.  He  goes  to  each 
of  the  manufacturers,  obtains  an  option  upon  their  prop- 
erties, agreeing  to  pay  for  the  same;  it  may  be  in  cash  or 
in  the  securities  of  the  new  corporation,  or  partly  in  cash 
and  partly  in  securities.  He  organizes  his  company  and 
agrees  to  sell  the  properties  upon  which  he  has  his  options 
to  the  ne^v  corporation  for  all  the  securities  that  it  has 
issued.  He  then  distributes  part  of  these  securities  to  those 
who  have  agreed  to  take  them  in  payment  for  their  prop- 
erties, and  sells  to  outsiders — new^  men — generally  called 
*'the  public,"  another  part  of  the  new  securities  for  cash, 
which  is  used  to  pay  the  money  to  those  manufacturers 
who  have  agreed  to  take  money  in  whole  or  in  part,  and 
also  an  agreed  part  of  the  cash  thus  realized  is  kept  in  the 
treasury  of  the  new  corporation  as  a  working  capital  to 
avoid  the  necessity  of  selling  the  paper  of  the  new  company, 
as  probably  all  of  the  concerns  thus  combined  had  lieen 
obliged  to  do  before  the  combination  was  made.  This  pro- 
vision of  cash  for  working  capital  is  also  generally  made 
in  whatever  way  the  combination  be  brought  about;  it  is 
certainly  always  done  if  good  judgment  and  prudence  have 
been  respected  in  the  formation  of  the  combination.  In 
many  cases,  I  think  it  may  be  said,  that  one  of  the  strong 
inducements  which  have  caused  manufacturers  to  enter 


278  CHARLES  S.  FAIRCHILD 

into  these  combinations  has  been  that  they  might  be  freed 
from  the  worry  and  peril  of  constantly  raising  money  on 
their  business  paper  to  carry  on  a  business  which  was  not 
equipped  with  sufficient  cash  capital. 

After  enough  of  the  securities  have  been  distributed 
and  sold  to  fulfill  the  engagements  of  the  promoter,  he 
tries  to  have  a  good  supply  left  in  his  hands  to  reimburse 
him  for  his  expenses  and  pay  him  for  his  time  and  labor. 
In  some  instances  this  pay  is  said  to  have  been  very  large. 
Naturally  as  to  this  I  have  no  positive  knowledge  in  any 
instance,  only  rumor  and  gossip.  This  method  of  payment 
is  the  same  as  that  of  the  reorganizers  of  railroad  and  other 
concerns;  it  is  in  the  nature  of  a  lawyer's  contingent  fee, 
dependent  upon  the  success  of  the  undertaking  or  suit, 
and  is  naturally  larger  than  it  would  be  if  made  in  cash. 

During  the  processes  which  I  have  described,  under- 
writing s}Tidicates  have  probably  been  employed  to  make 
sure  that  a  sufficient  amount  of  securities  shall  be  sold 
to  secure  the  cash  needed,  and  there  have  been  one  or  more 
bankers  who  may  have  loaned  money  needed,  pending  the 
final  launching  of  the  new  company  and  may  also  have 
been  employed  to  bring  out  its  securities,  i.e.,  offer  them 
for  subscription  by  the  public.  Syndicates  and  bankers 
must  be  paid  their  commissions  out  of  the  surplus  securities. 

Perhaps  a  concrete  illustration  may  help  toward  a 
clearer  understanding  of  just  how  this  part  of  the  finan- 
ciering of  these  combinations  is  managed.  Let  us  assume 
that  the  promoter  has  secured  options  upon  the  plants, 
assets  and  good-will  of  ten  separate  manufacturing  con- 
cerns, for  which  he  is  to  pay,  under  the  terms  of  his  op- 
tions, $3,000,000  in  cash  and  $6,000,000  in  preferred  stock 
and  $4,000,000  in  common  stock  of  a  new  company  of  $20,- 
000,000  capital  (half  preferred  stock)  to  be  foimed  to  ac- 
quire the  entire  plants,  stock  and  other  assets,  good-will, 
etc.,  of  the  ten  concerns  specified,  and  to  have  when  formed 
at  least  $1,000,000  of  working  capital.    As  soon  as  these 


THE  FINANCIERING  OF  TRUSTS  279 

options  are  iu  this  dctiiiiti'  shajx'  the  promoter  goes  to  some 
finaneial  house  or  firm  of  })rivate  ])aiikers  for  assistance  in 
raising-  the  ;i^4,000,000  of  casli  which  the  plan  requires.  He 
presents  the  facts  as  to  his  options  and  his  program  and 
proposes  that  if  they  will  arrange  a  syndicate  to  under- 
write or  guarantee  the  purchase  of  $4,000,000  of  preferred 
stock  and  $4,000,000  common  stock  for  $4,000,000  in  cash 
he  will  give  them  a  commission  of  5,000  shares  of  the  com- 
mon stock  of  the  company.  The  bankers  give  the  entire 
project  careful  investigation,  usually  employing  experts 
and  accountant-s  to  report  upon  the  facts  as  to  the  business 
and  profits  of  the  constituent  companies.  If  the  result 
is  satisfactory,  the  promoter  gets  a  favorable  answer  and 
the  bankers  become  the  managei^s  of  an  under^vriting 
syndicate.  In  carrying  out  this  part  of  the  program  they 
proceed  to  lay  the  matter  before  the  individuals  or  com- 
panies to  whom  they  desire  to  offer  an  interest  in  the  mar- 
keting of  the  stock.  This  is  naturally  done  by  submitting 
copies  of  a  s^Tidicate  agreement  reciting  that  the  subscrib- 
ers agree  to  purchase  at  par  the  num])er  of  shares  of  pre- 
ferred stock  set  opposite  their  respective  names,  receiving 
as  a  bonus  an  equal  amount  of  common  stock — Init  the 
whole  conditioned  upon  there  being  an  aggregate  subscrip- 
tion equal  to  the  $4,000,000  to  be  raised.  If  this  amount 
is  oversubscribed  some  subscriptions  are  either  thrown  out 
or  cut  down.  If  it  is  not  subscri])ed  the  project  has  to  be 
abandoned  or  modified.  In  some  cases  the  desired  end  is 
sought  by  a  public  announcement  of  the  terms  on  which 
subscriptions  will  be  received. 

If  the  entire  $4,000,000  is  subscribed  the  next  step  is 
to  require  the  payment  of  the  subscriptions  allotted.  This 
gives  the  syndicate  managers  the  $4,000,000  cash  which  the 
plan  requires.  The  new  company  is  then  incor])<)rated  with 
an  authorized  capital  of  $10,000,000  preferred  and  $10,000,- 
000  common  stock,  of  which  perhaps  $5,000  of  the  common 
stock  is  paid  up  at  once;  and  on  this  the  company  begins 


280  CHARLES  S.  FAIRCHILD 

business  witH  a  regular  board  of  directors.  The  stock- 
holders owning  this  first  $5,000  of  stock  (50  shares)  then 
vote  to  authorize  the  increase  of  the  capital  to  the  amount 
fixed  in  the  certificate  of  incorporation  and  approve  the 
issue  of  all  the  additional  stock  in  a  block  to  John  Doe, 
the  promoter,  in  exchange  for  the  various  plants,  assets, 
etc.,  and  the  $1,000,000  cash  which  the  new  company  was 
to  acquire.  Then  by  simultaneous  transactions  John  Doe 
gets  the  $10,000,000  preferred  stock  and  $9,995,000  com- 
mon stock;  of  this  $6,000,000  of  the  preferred  and  $4,000,- 
000  of  the  common  stock  are  passed  on  to  the  owners  of  the 
original  companies;  $4,000,000  of  each  is  passed  to  the  syn- 
dicate, whereupon  it  turns  over  to  John  Doe  the  $4,000,000 
of  cash,  which  he  in  turn  uses  to  pay  the  cash  required  by 
the  options  and  that  which  is  to  go  into  the  treasury  of 
the  new  company;  at  the  same  time  the  titles  of  the  various 
properties  are  passed  to  the  new  company.  John  Doe  then 
finds  himself — after  turning  over  to  the  banking  house 
which  formed  the  syndicate  the  5,000  shares  of  common 
stock  agreed  upon  as  commission  for  their  services — the 
possessor  of  14,950  shares  of  common  stock,  of  the  par  value 
of  $1,495,000. 

In  planning  the  details  of  the  various  consolidations 
there  has  been  great  diversity.  In  some  cases  there  has 
been  only  a  single  kind  of  stock — common  stock.  Such, 
for  example,  are  the  Standard  Oil  Company  and  the  Amal- 
gamated Copper  Company — both  among  the  largest  of  the 
so-called  trusts.  In  most  cases,  however,  there  have  been 
two  kinds  of  stock — preferred  and  common — frequently  ev- 
enly divided  in  amount  between  the  two.  When  put  out  to 
the  public  through  a  syndicate,  the  preferred  stock  has  usu- 
ally been  offered  at  par  with  a  bonus  of  an  equal  amount,  or 
60  per  cent,  75  per  cent,  or  80  per  cent,  in  common  stock.  In 
the  terms  on  which  the  preferred  stock  is  issued,  there  is 
equal  diversity.  So  far  as  one  can  generalize,  it  might  per- 
haps be  said  that  the  most  general  plan  has  been  to  issue  a  6 


THE  FINANCIERING  OF  TRUSTS  281 

per  cent  or  7  per  rent  proferrod  stock,  pi'of erred  not  only 
as  to  dividend  named,  but  as  to  assets  as  well.  In  some 
cases  the  position  of  the  preferred  stook  has  been  made 
exceptionally  strong.  Take,  lor  example,  the  preferred 
stock  of  the  Royal  Bakini^  Powder  Company  which,  under 
the  ])lan  there  followed,  is  allowed  no  voting  power  or  rep- 
resentation in  the  management  so  long  as  the  quarterly  div- 
idends of  6  per  cent  per  annum  are  regularly  and  promptly 
paid.  But  if  there  should  be  a  default  in  the  payment  of 
that  dividend,  the  entire  voting  power  and  management 
pass  from  the  common  to  the  preferred  stockholders.  This 
provision  thus  leaves  the  preferred  stockholders  in  much 
the  same  position  as  if  their  interest  was  represented  by 
])onds— hut  without  the  difficulty,  expense  and  delay  of 
foreclosure  in  case  of  default  in  payment  of  interest. 

In  the  most  of  the  recent  consolidations  there  has  been 
included  no  bonded  debt.  This  I  believe  to  be  wise,  inas- 
much as  it  leaves  the  company  with  no  fixed  charges  and 
thus  in  a  much  stronger  position  in  a  period  of  depression 
than  it  would  occupy  if  it  were  obliged  to  meet  the  inter- 
est on  a  large  amount  of  bonds.  Because  of  this  infrequent 
use  of  bonds  in  the  consolidations  which  have  been  made 
in  the  industrial  field,  the  first  long  continued  period  of 
depression  will  not  produce  the  abundant  crop  of  reorgan- 
izations that  has  in  the  past  attended  depression  in  the 
railroad  field. 

In  the  issue  of  common  and  preferred  stocks  in  the 
capitalization  of  the  corporations  we  are  considering,  an 
attempt  has  frequently  been  made  to  limit  the  preferred 
stock  to  the  value  of  the  actual  tangible  assets  turned  over 
to  the  new  company,  real  estate,  plants,  tools,  machinery, 
stocks  of  goods,  working  capital,  etc.,  leaving  the  connnon 
stock  to  cover  the  value  of  the  good-will,  expected  earn- 
ings, expenses  of  promotion,  etc.  This  brings  up  a  ques- 
tion which  is  of  much  importance  to  those  wlio  invest  in 
the  new  company's  stock,  viz.:  ''Tn  what  manner  has  the 


282  CHARLES  S.  FAIRCHILD 

value  of  this  good-will  been  estimated  in  fixing  a  price 
upon  the  various  constituent  companies?"  Neariy  every 
proposition  for  a  consolidation  has  been  accompanied  by 
the  results  of  a  careful  investigation  into  the  net  earnings 
of  the  constituent  companies  for  a  number  of  years  past. 
These  earnings,  augmented,  perhaps,  by  an  estimate  of 
the  economies  to  be  effected  by  the  consolidation  of  the 
various  enterprises,  form  the  basis  of  the  estimated  net 
earnings  of  the  new  company.  Care  is  then  taken  that  the 
capital  stock  is  not  made  so  large  that  the  estimated  earn- 
ings will  not  afford  the  dividend  upon  the  preferred  stock 
and  a  substantial  dividend  upon  the  common  stock. 

In  some  cases  the  value  of  the  good-will  acquired  has 
been  very  carefully  estimated.  For  example,  the  promot- 
ers of  one  company  made  a  sjDecial  point  of  the  conserv^a- 
tive  methods  employed  in  arriving  at  the  value  of  the  good- 
mil  of  the  companies  which  were  consolidated.  Accord- 
ing to  their  statement  the  new  company  was  virtually  buy- 
ing the  real  estate,  plants,  stock,  etc.,  on  the  basis  of  ap- 
praised cash  value.  In  addition  an  allowance  was  made 
for  good- will,  calculated  upon  this  basis :  From  the  net  prof- 
its of  each  company  deduct  7  per  cent  upon  the  capital  ac- 
tually emplo.ved,  IJ  per  cent  upon  sales,  which  were  about 
three  times  the  capital,  2  per  cent  for  depreciation  on  brick 
buildings,  4  per  cent  on  frame  buildings,  and  8  per  cent  on 
machinery;  if  the  average  net  earnings  were  in  excess  of 
all  this,  and  in  this  case  it  appeared  from  the  promoter's 
statement  that  they  usually  were,  the  excess  was  capital- 
ized as  good-will  on  the  basis  of  20  per  cent  per  annum, 
i.e.,  the  value  of  the  good- will  was  estimated  to  be  five  times 
the  amount  of  such  earnings  in  excess  of  7  per  cent  on 
capital  and  allowance  for  depreciation. 

In  some  cases,  however,  there  has  not  even  been  a  pre- 
text that  the  capitalization  was  based  upon  a  careful  inves- 
tigation of  the  actual  earnings  of  the  constituent  companies. 
I  have  in  mind  a  certain  consolidation  which  it  was  de- 


THE  FINANCIERING  OF  TRUSTS  283 

sired  to  effect.  The  promoters  and  the  brokers  who  at- 
tempted to  bring  it  out,  however,  in  their  prospeetuses 
carefully  avoided  the  subject  of  actual  net  earnings  of  the 
constituent  companies,  but  based  the  estimate  of  earnings 
of  the  new  company  upon  nothing  more  reliable  than  the 
quantity  of  product  annually  turned  out  and  an  estimate 
that  the  selling  price  had  been  and  would  be  about  twice 
the  cost  of  producing  the  article.  It  is  hardly  to  be  won- 
dered at  that  the  project  was  not  sufficiently  attractive 
to  enlist  the  necessary  investment  support. 

Many  of  these  large  industrial  coii^orations  have  been 
formed  to  purchase,  not  the  actual  plants  and  assets,  but 
tlie  whole  or  a  large  part  of  the  stock  of  the  constituent 
companies.  This  stock  even  when  the  whole  is  owned  by 
the  new  corporation,  is  then  kept  alive  and  constitutes  the 
formal  assets  of  the  new  company. 

I  might  describe  all  the  steps  taken  in  the  formation 
of  the  corporation,  were  there  time;  but  it  is  only  what 
is  done  in  the  foraiation  of  a  corporation  for  any  purpose, 
and,  while  interesting,  does  not  belong  especially  to  this 
subject. 

I  have  a  table  of  the  kinds  and  amounts  of  the  securi- 
ties used  by  some  of  the  more  important  of  the  200  or  300 
corporations  of  this  nature  that  have  been  formed  within 
the  past  few  years.    (This  table  is  show^n  on  page  285.) 

All  this  that  I  have  described  which  is  in  excess  of 
what  is  done  in  the  formation  of  the  cheese  manufactur- 
ing combination  is  rendered  necessary  either  by  the  state 
law^s  governing  corporations  or  by  the  need  of  raising  cash 
capital,  or  to  enable  the  constituent  membei-s  of  the  corpo- 
ration to  conveniently  collect  their  profits  from  the  com- 
bined business  in  proper  proportions  and  to  have  a  repre- 
sentation of  their  interests  therein  which  is  divided  in  such 
form  as  to  enable  portions  of  it  to  be  sold  or  transmitted  to 
heirs,  etc.,  etc. 

In  substance,  however,  there  is  no  difference.     The 


PM  CHARLES  S.  FAIRCHILD 

milk  delivered  morning  and  evening  during  the  year  is 
each  farmer's  contribution  to  the  combination;  his  inter-* 
est  in  the  whole  varies  according  to  both  quality  and  quan- 
tity of  milk,  just  as  in  the  other  combinations  the  interests 
vary  according  to  the  quality  and  quantity  of  property  and 
good-will  or  business  contributed  by  each.  Just  as  a  cream- 
ery will  be  successful  as  it  is  well  or  badly  managed,  or  as 
is  the  market  for  its  products,  so  in  like  proportion  will 
any  other  business  combination  succeed,  and  for  like  causes. 
The  larger  combinations,  however,  through  their  securi- 
ties affect  financial  matters  generally  to  a  greater  or  less 
extent  as  they  come  into  the  stock  market  and  into  the 
field  of  investment  and  speculation.  Naturally  the  uncer- 
tainty as  to  amount  and  regularity  of  profits  attendant 
upon  one  of  these  enterprises  while  it  is  new  will  make 
its  securities  a  fruitful  object  of  speculation.  Time  and 
experience  will  sift  them  and  cause  each  one  to  take  its 
proper  place  in  the  share  list.  All  other  business  securi- 
ties, be  they  railroad,  telegraph,  bank  stocks  or  whatnot, 
have  and  must  go  through  a  like  sifting  and  settling  process 
and  their  values  are  and  will  be  constantly  changing.  Some 
of  the  other  industrials,  as  they  are  called,  have  come  to 
be  as  regular  in  their  dividends  and  as  stable  in  price  as 
the  best  railroad  stocks,  and  some  of  them  are  much  more 
removed  from  the  speculative  field. 


THE  FINANCIERING  OF  TRUSTS 


285 


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286 


CHARLES  S.  FAIRCHILD 


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THE  RELATION  OF  THE  FINANCIAL  TRUST  COM- 
PANY  TO  THE  INDUSTRIAL  TRUST.' 

BY  L.  WALTER  SAMMIS. 

[Associate    Editor   of   the    New   York   Sun.l 

At  the  outset  I  desire,  without  any  reservation,  to  em- 
phasize my  position;  namely,  that  I  deal  with  this  topic 
in  my  personal  capacity,  and  not  in  any  sense  as  represent- 
ing any  other  body  or  bodies  of  men,  and  without  in  any 
wise  reflecting  the  views  of  any  one  else. 

It  is  my  good  fortune  to  be  a  member  of  the  editorial 
staff  of  the  New  York  Sun,  but  it  must  be  distinctly  im- 
derstood  that  neither  the  substance  nor  the  language  of 
my  address  has  been  submitted  to  any  of  my  associates, 
nor  is  the  New  York  Sun  in  anywise  responsible  for  my 
statements. 

It  is  equally  important  that  my  position  shall  be  clearly 
understood  as  to  combinations  of  capital,  commonly  called 
trusts,  and  also  as  to  "trust  companies,"  both  actual  and 
nominal. 

Whatever  may  be  said  in  this  address  with  reference  to 
the  morale  of  the  Shipbuilding  Trust,  must  not  be  under- 
stood as  defining,  or  even  reflecting  my  attitude  towards 
all  combinations.  I  am  not  an  anti-trust  man.  I  do  not 
take  the  position  that  the  combination  movement  in  itself  is 
bad,  or  that  all  combinations  are  necessarily  wrong  or 
evil-producing  in  their  results,  and  it  is  too  palpable  to 
require  affiiTnation,  not  only  that  tnist  companies  were 
originally  fiduciary  institutions,  but  also  that  many  of  them 
remain  so  in  the  true  sense  of  the  word  today. 

Industrial  combinations  are  not  the  natural  result  of 
business  conditions;  neither  are  they  the  pure  outgrowth 

*  Courtesy  of  the  American  Academy  of  Political  and  Social  Science. 

287 


288  L.  WALTER  SAMMIS 

of  economic  principles.  Trusts  are  made,  not  bom.  They 
are  creatures  of  invention  which  find  their  origin  in  the 
brain  of  the  industrious  promoter  whose  inventive  facul- 
ties are  stimulated  by  the  desire  to  possess  unearned 
wealth.  "Necessity  is  the  mother  of  invention,"  even  as 
applied  to  the  invention  of  a  trust,  but  the  necessity  in  this 
case  is  not  the  necessity  created  by  economic  laws,  but 
the  necessit}"  of  the  promoter.  Trust  companies  and  similar 
institutions  sometimes  bear  the  same  relation  to  industrial 
combinations  as  manufacturers  do  to  the  product  of  the 
mechanical  or  scientific  inventor's  brain.  They  label  it, 
give  it  place  on  the  market,  compensating  themselves  by 
getting  the  largest  obtainable  profit  for  the  least  possible 
risk  or  responsibility. 

Originally  trust  companies  were  strictly  fiduciary  insti- 
tutions. They  partook  of  the  character  of  the  name 
"Trust."  They  took  charge  of  estates  and  managed  them; 
they  were  custodians  of  mortgages,  fiscal  agents  for  rail- 
roads and  other  large  combinations  of  capital;  they  attend- 
ed to  all  the  affairs  pertaining  thereto  and  transacted  busi- 
ness solely  of  a  fiduciary  nature.  They  were  managed  with 
a  conservatism  creditable  to  our  fathers  and  admired  by 
ourselves.  I  am  not  to  be  misunderstood  as  saying  that 
none  of  the  old  line  trust  companies  are  in  existence.  They 
can  be  distinguished  readily  by  the  character  of  their 
officers  and  the  kind  of  business  they  transact. 

Modern  times,  lax,  but  so-called  up-to-date,  methods 
have  permitted  conditions  different  from  those  under  which 
the  old-line  companies  did  business. 

Some  of  these  methods  would  shock  the  ordinary  out- 
sider, but  High  Finance  has  a  code  all  its  o^^ti,  fitting  the 
business  processes  of  its  adherents,  elastic,  pliable  and 
capable  of  such  construction  that  a  financier  is  never 
guilty  of  an  offense  so  long  as  there  are  no  complaining 
losers.  In  the  powerful  financial  centers  some  operators 
deny  the  truth  of  the  axiom  that  the  shortest  distance 


FINANCIAL  AND  INDUSTRIAL  TRUSTS      289 

hotwoeii  two  points  is  a  straight  lino.  IVratlioniatically  tho 
axiom  may  be  time,  but  in  High  Finance  the  shortest  dis- 
tance between  two  points  is  the  way  by  which  the  greatest 
amount  of  money  can  be  made.  Regardless  of  the  number 
of  crooks  and  turns  that  are  in  this  line,  according  to  a 
certain  class  of  High  Finance  ethics,  it  is  as  straight  as 
a  string  drawn  taut.  It  is  my  purpose  to  point  out  some 
of  the  ramifications  in  one  of  these  so-called  straight  lines. 

Through  the  protracted  legal  proceedings  against  the 
United  States  Shipbuilding  Company,  the  public  has  had  an 
opportunity  to  observe  the  methods  by  which  an  industrial 
combination  was  actually  financed. 

A  photograph  of  how  it  was  done,  rather  than  a  thesis 
on  how  it  should  be  done,  is  the  result. 

The  United  States  Shipbuilding  Company  is  claimed  to 
have  been  incorporated  under  the  laws  of  the  State  of  New 
Jersey  by  dummies  furnished  for  the  occasion  on  June  17, 
1902, 'with  a  subscribed  capital  of  $3,000.  On  July  3d 
following,  the  capitalization  was,  on  paper,  increased  to 
$45,000,000  in  stock  and  $26,000,000  of  bonds.  On  the 
11th  and  12th  of  August  the  United  States  Ship])uilding 
Company  purchased  the  Union  Iron  Works,  The  Bath  Iron 
Works,  Limited,  The  Hyde  Windlass  Company,  The  Cres- 
cent Shipyard  Company,  The  Samuel  L.  ]\roore  &  Sons 
Company,  The  Eastern  Shipbuilding  Company,  The  Harlan 
&  Hollingsworth  Company,  The  Cauda  Manufacturing 
Company  and  the  capital  stock  of  the  Bethlehem  Steel 
Company,  paying  for  them  $6,000,000  in  cash,  $14,050,000 
of  bonds  and  $28,000,000  of  stock.  The  entire  amount  of 
securities  disposed  of  to  acquire  these  companies  and  to 
provide  $15,000,000  working  capital  and  to  pay  the  profits 
of  the  various  persons  and  institutions  conceraed  in  the 
promotion  amounted,  at  par  value,  to  $69,500,000.  For  this 
bouquet  of  fortunes  the  combination  received,  besides  the 
reputed  cash  working  capital  of  $1,500,000,  constituent 
companies  which,  omitting  the  Bethlehem  Steel  Company, 


290  L.  WALTER  SAMMIS 

were  valued  later  by  competent  men  at  $12,441,518.26. 
The  Mercantile  Trust  Company  was  custodian  of  a  first 
mortgage  on  the  plants  for  $16,000,000  and  the  New  York 
Security  and  Trust  Company  was  custodian  of  a  collateral 
mortgage  of  $10,000,000  on  the  capital  stock  of  the  Bethle- 
hem Steel  Company,  which  was,  besides,  a  second  mortgage 
on  the  Shipbuilding  plants.  It  will  be  observed  that  the 
first  financial  institution  having  relations  with  the  United 
States  Shipbuilding  Company  was  the  Mercantile  Trust 
Company,  the  attorneys  of  which  were  Messrs.  Alexander 
&  Green. 

The  Trust  Company  of  the  Republic  was  then  asked  to 
become  banker  for  the  issue  of  the  bonds,  and  it,  with  the 
Mercantile  Trust  Company,  played  important  parts  in  the 
undertaking.  The  Trust  Company  of  the  Republic,  through 
its  president,  advanced  large  sums  of  mone}^,  much  of 
which  was  obtained  by  borrowing  on  Shipbuilding  securi- 
ties countersigned  by  the  Mercantile  Trust  Company  as 
registrar.  When  the  crash  came  the  Trust  Company  of 
the  Republic  was  able  to  figure  up  a  cash  loss  of  $982,334. 

With  the  fall  of  the  United  States  Shipbuilding  Com- 
pany my  story  has  nothing  to  do.  My  theme  is  the  methods 
by  which  it  was  established,  false  and  insecure  as  that  es- 
tablishment was,  and  my  story  must  end  at  the  point  where 
it  was  left  to  stand  alone,  fpr  at  that  point  it  reached  its 
climax. 

To  a  full  understanding  of  the  matter,  it  is  necessary 
to  take  up  the  tale  at  the  beginning. 

John  W.  Young,  Avhose  father,  Brigham  Young,  sue- 
ceeded  Joseph  Smith  as  the  head  of  the  Mormon  Church, 
arrived  in  New  York  in  the  closing  year  of  the  nineteenth 
century  with  a  theory.  He  was  a  promoter  who  had  not 
met  unvarj^ing  success  in  his  many  previous  ventures,  but, 
like  all  promoters  from  Col.  Sellers  down,  he  possessed  the 
faculty  of  dreaming  dreams  and  telling  them  so  convinc- 
ingly that  they  lost  their  element  of  unreality  and  took 


FINANCIAL  AND  INDUSTRIAL  TRUSTS      291 

upon  themselves  the  seml)kince  of  established  facts  in  the 
niiuds  of  his  listeners.  Young  had  the  idea  that  it  would 
be  a  good  stroke  of  business  to  combine  the  leading  ship- 
building industries  of  the  country  into  one  gigantic  corpo- 
ration, and  had  worked  out  a  theory  by  which  it  could  be 
done  with  much  profit  to  the  promoters. 

Young's  idea  was  good,  but  his  method,  which  he  made 
inseparable  from  his  idea,  was  bad.  But  it  was  spangled 
with  prospective  coins,  glittering  with  possibilities  and 
laden  with  immense  prospective  fortunes.  After  many 
futile  attempts,  he  succeeded  in  finding  a  group  of  men  who 
were  willing  to  listen  while  he  ex^oloited  his  idea  and 
expounded  his  theory.  These  men  accepted  his  theory,  and 
adopted  his  method,  and,  using  it  as  a  base,  constructed 
thereon  a  situation  which  they  called  a  trust,  and  which 
was  incorporated  under  the  name  of  the  United  States 
Shipbuilding  Company.  The  theory  was  impossible;  the 
situation  was  untenable;  the  trust,  as  it  was  manufactured, 
was  impracticable,  and  the  United  States  Shipbuilding 
Company  was  insolvent. 

The  financial  world  was  absorbed  at  that  time  in  creat- 
ing industrial  combinations,  some  of  which  were  either 
actually  bankrupt  or  were  on  the  verge  of  bankruptcy;  in- 
flating values  and  watering  stocks;  successfully  offering 
new  securities  to  a  public  riotously  eager  to  buy  them,  and 
finally  dividing  with  promoters  and  vendors,  profits  which, 
even  in  that  era  of  inflation,  were  considered  enormous. 
Young  knew  that  his  plan  was  richer  in  paper  profits  than 
any  that  had  been  brought  to  a  successful  issue,  with  the 
possible  exception  of  one,  and  that  it  had  large  fortunes 
to  scatter  among  the  men  who  might  assist  him  to  develop 
it  into  an  accomplished  fact,  so  far  as  obtaining  the  money 
of  the  investor  and  the  speculator  for  elegantly  litho- 
graphed pieces  of  paper  was  concerned.  He  talked  of  it 
and  wrote  it  on  pai:)er;  he  had  it  printed  in  the  terms  best 
api^reciated  by  financial  chieftains — a  dollar  mark  and 


292  L.  WALTER  SAMMIS 

seven  or  eight  figures  on  the  left  hand  side  of  the  decimal 
point.    But  he  got  no  real  start  until  he  met  Le\Yis  Nixon. 

Mr.  Nixon  had  been  a  constructor  in  the  United  States 
Navy,  but  had  resigned  from  the  service  to  engage  with 
the  Cramps.  As  a  naval  constructor  he  designed  the 
Oregon,  the  Indiana  and  the  Massachusetts  and  these  ves- 
sels established  his  reputation  as  one  of  the  ablest  ship- 
builders in  the  world.  Before  he  met  Young  he  purchased 
the  Crescent  Shipyards  at  Elizabethport,  N.  J.,  for  about 
$7,000,  organized  a  company,  capitalized  for  $1,120,000,  re- 
taining in  his  o^Ti  name  all  the  stock  except  so  much  as 
was  required  to  qualify  directors.  Young  interested  Nixon 
by  showing  him  an  option  for  the  purchase  of  the  Newport 
News  Shipbuilding  and  Dry  Dock  Company,  and  Nixon 
gave  him  an  option  on  his  own  plant  and  agreed  to  work 
with  him  in  forming  the  proposed  combination.  This  was 
the  start.  Young  now  had  two  options  and  the  name  and 
reputation  of  the  greatest  shipbuilder  of  the  United  States 
to  work  with. 

He  had  the  co-operation  of  Col.  John  J.  McCook,  a 
director  in  the  Mercantile  Tnist  Company  and  as  well  an 
active  partner  of  the  law  firm  of  Alexander  &  Green,  coun- 
sel for  the  Mercantile  Trust  Company,  counsel  for  John 
W.  Young,  counsel  for  the  United  States  Shipbuilding 
Company,  and  acting  from  time  to  time  as  counsel  for 
Nixon  and  Dresser  as  the  Shipbuilding  Syndicate.  Col. 
McCook,  as  he  has  told  me,  became  intensely  interested 
in  the  proposed  combination  and  did  all  he  could  to  ac- 
complish it.  Young  occupied  a  room  adjacent  to  the  offices 
of  Alexander  &  Green,  and  Col.  McCook  and  he  appear 
to  have  worked  in  unison.  Options  on  other  shipbuilding 
companies  were  obtained  and  the  plan  was  submitted  to 
the  banking  house  of  H.  W.  Poor  &  Co.,  on  Wall  Street, 
which  finally  consented  to  become  banker  for  an  issue  of 
bonds  and  a  prospectus  was  issued.  The  companies  which 
were  then  to  be  included  in  the  deal  were  substantially  the 


FINANCIAL  AND  INDUSTRIAL  TRUSTS      293 

same  as  those  which  finally  entered  it.  Tlic  prospectus  was 
ready  for  issue  on  May  7,  1901,  but  on  this  day  occuiTed 
what  is  kno\\Ti  as  the  Northern  Pacific  panic,  and  the 
pamphlets  were  not  distri])uted.  Some  say  this  was  because 
of  the  panic;  others  that  it  was  because  no  satisfactory 
report  could  be  obtained  of  the  annual  earnings  of  the  con- 
stituent companies.  WliatcA-er  the  reason,  the  project  fell 
flat  and  Poor  &  Co.  did  not  attempt  to  revive  it.  The  pro- 
moters had  all  their  work  to  do  over  again.  For  nearly  a 
year  they  seem  to  have  tried  unsuccessfully  to  get  other 
financial  houses  to  assume  the  undertaking.  ^Meanwhile, 
they  succeeded  in  renewing  some  of  their  options. 

bn  the  31st  of  March,  1902,  the  Trust  Company  of  the 
Republic  opened  its  doors  for  business  at  346  Broadway. 
Its  capital  was  $1,000,000,  and  its  surplus  $500,000.  The 
Tnist  Company  of  the  Republic  proposed  to  deal  with  cot- 
ton growers  in  the  South  who  are  accustomed  to  borrowing 
money  at  New  York  legal  rate  of  interest  plus  a  bonus.  It 
intended  to  lend  money  to  the  cotton  people  against  crops 
stored  in  warehouses,  at  the  legal  rate  of  interest  and 
without  bonus,  and  to  borrow  money  in  the  North  against 
these  crops  and  on  other  securities  which  it  should  accumu- 
late. The  opportunities  for  a  large  and  lucrative  business 
were  bright  and  allui'ing.  The  new  trust  company  had 
among  its  organizers  and  directors  men  whose  names  stood 
and  today  stand  for  strength  and  probity  in  the  world  of 
finance.  Alexander  Creig,  President  of  the  Security  Ware- 
house Company  of  New  York,  with  whose  institution  the 
new-bom  trust  company  immediately  formed  an  affilia- 
tion, was  one  of  the  organizers. 

As  the  head  of  this  concern  whose  future  seemed  to 
promise  so  much,  the  directors  selected  Daniel  LeRoy 
Dresser.  Mr.  Dresser  was  a  merchant.  He  had  been  the 
President  of  the  ^lerchants'  Association  of  New  York  and 
had  filled  the  position  not  incompetently,  but  his  experience 
in  the  financial  world  was  almost  nil.     However,  he  had 


294  L.  WALTER  SAMMIS 

valuable  financial  connections.  By  means  of  these  connec- 
tions lie  may  have  been  expected  to  bring  a  large  volume  of 
business  to  the  Trust  Company  of  the  Eepublic.  It  may  be 
that  Mr.  Dresser  was  competent  to  handle  the  ordinary 
business  of  the  Trust  Company— indeed,  no  word  of  blame 
has  ever  been  spoken  of  his  management  of  the  regular 
business— but  when  he  entered  into  the  industry  of  trust 
manufacturing,  he  succeeded  only  in  inviting  ruin  both  to 
his  company  and  himself.  He  was  bold  with  the  boldness  of 
ignorance,  incautious  in  his  dealings  with  other  financial  in- 
stitutions and  unable  to  deduce  from  the  experience  of 
others  the  natural  outcome  of  his  exceeding  erratic  meth- 
ods and  his  inept  handling  of  weighty  matters. 

The  personal  affairs  of  Mr.  Dresser,  however,  are  not 
within  the  scope  of  this  paper,  except  so  far  as  they  indi- 
cate a  lack  of  experience  in  the  man  who,  above  all  others, 
except  the  actual  deus  ex  machina,  was  responsible  for  the 
flotation  of  the  United  States  Shipbuilding  Company  and 
the  methods  by  which  it  was  accomplished.  It  is  fair  to  say 
that  none  except  a  tyro  would  have  undertaken  to  finance 
matters  of  such  vast  importance  by  the  methods  he  adopted, 
and  that  a  man  of  wider  experience  and  a  larger  measure 
of  forethought  would  have  dropped  the  whole  thing  before 
the  borrowing  period  arrived,  and  would,  indeed,  have 
thrown  it  overboard  upon  the  first  indication  that  the  entire 
burden  of  responsibility  was  to  be  placed  upon  his 
shoulders. 

Nevertheless,  here  was  a  new  trust  company,  anxious 
for  business,  with  a  man  inexperienced  in  financial  affairs 
at  its  head.  In  the  same  city  were  an  eager  promoter  and 
a  firm  of  lawyers,  allied  to  a  large  trust  company  with 
powerful  affiliations,  who  had  for  a  long  time  used  every 
effort  to  obtain  the  support  of  a  financial  institution  in  their 
joint  project  without  success.  Such  a  combination  has  its 
possibilities.  They  were  sufficiently  attractive  for  Mr. 
Young,  the  promoter,  to  seek  an  interview  with  Mr.  Dresser. 


FINANCIAL  AND  INDUSTRIAL  TRUSTS      295 

He  succeeded,  Init  not  until  it  had  been  made  apparent  to 
^Ir.  Dresser  that  Col.  John  J.  ^IcCook  was  associated  with 
him,  as  counsel  or  otherwise,  in  the  plnii  wliidi  lie  liad  to 
propose.  The  promoter  did  not  at  first  broach  the  subject 
of  the  United  States  Shipl)uildin,2:  Company.  ^Ir.  Dresser 
was  told  of  a  syndicate  of  Frencli  ])ankers  who  desired  to 
trade  in  American  industrial  securities  and  do  their  trading 
on  this  side  of  the  Atlantic  so  that  they  might  avoid  the  tax 
to  which  such  transactions  are  subject  when  accomplished 
within  the  jurisdiction  of  the  laws  of  France.  There  is 
evidence  that  it  was  represented  to  ^Ir.  Dresser  that  the 
syndicate  had  been  fomied  and  was  waiting  only  to  make 
a  connection  with  a  responsible  and  reputable  house  in 
the  United  States.  Profits  derived  from  business  which 
they  should  transact  together  were  to  be  divided  equally. 

This  seemed  to  Mr.  Dresser  to  be  an  excellent  opportu- 
nity for  the  Trust  Company  of  the  Republic,  especially  since 
the  capital  of  the  French  institution  was  represented  to  be 
20,000,000  francs,  and  before  the  former  was  a  month  old 
the  preliminary  arrangements  for  a  working  agreement  had 
been  completed  and  in  writing.  Before  the  binding  agree- 
ments were  attempted,  the  matter  of  the  French  banking 
house,  of  the  existence  of  which  no  proof  has  ever  been  ad- 
duced, was  dropped,  and  the  plan  for  forming  a  shipbuild- 
ing combination  was  substituted.  Exactly  how  this  was 
accomplished  it  is  almost  impossible  to  deteimine.  The 
truth  is  difficult  to  ascertain  when  the  statements  of  the 
individuals  most  interested  vary  so  widely.  As  a  matter  of 
fact,  though,  while  negotiations  concerning  the  French 
banking  house  were  still  uncompleted,  Young  sailed  for 
Paris,  leaving  his  affairs  in  the  hands  of  his  lawyers.  This 
was  on  April  22d.  At  this  time,  according  to  the  statements 
of  both  Col.  ^IcCook  and  Mr.  Dresser,  made  to  me  person- 
ally, the  Trust  Company  of  the  Republic  still  thought  it  was 
to  co-operate  with  a  French  S}Tidicate  in  the  purchase  and 
sale  of  American  securities. 


296  L.  WALTER  SAMMIS 

Mr.  Young  was  absent  on  this  trip  to  Paris  about  three 
weeks,  leaving  New  York  about  April  22d.  He  returned 
to  America  about  May  15th.  During  his  brief  stay  in  this 
country,  before  he  took  his  second  trip  to  Paris,  copies  of  a 
prospectus  for  the  consolidation  of  the  shipbuilding  plants 
under  the  name  of  the  United  States  Shipbuilding  Com- 
pany appeared,  without  the  name  of  any  trust  company 
as  the  banker,  but  with  that  of  the  Mercantile  Trust  Com- 
pany as  trustee  of  the  mortgage  and  transfer  agent  of  the 
stocks,  and  Alexander  &  Green  as  counsel. 

Mr.  Dresser  was  asked  to  take  up  the  matter  of  ex- 
ploiting the  United  States  Shipbuilding  Company.  A  mem- 
orandum was  shown  to  him,  setting  forth  the  profits  which 
were  to  be  derived  from  the  successful  perfonnance  of  this 
work.  Dresser  agreed  that  the  Trust  Company  of  the 
Republic  should  act  as  banker,  their  name  Avas  inserted  in 
the  blank  space  left  for  this  purpose  and  the  prospectus 
was  ''confidentially"  issued. 

The  original  proposition  was  to  issue  $16,000,000  of 
bonds  and  $20,000,000  of  stock,  divided  equally  into  com- 
mon and  preferred  shares.  This  was  before  the  Bethlehem 
Steel  Company  was  considered. 

A  digest  of  the  memorandum  shows  that  it  was  pro- 
posed to  dispose  of  $9,000,000  of  bonds,  $2,500,000  of  pre- 
ferred stock  and  $2,500,000  of  common  stock  in  order  to 
realize  $8,100,000  in  cash.  Of  the  cash  and  securities  then 
remaining  and  in  hand  $6,400,000  in  cash,  $4,050,000  of 
bonds,  $4,000,000  of  preferred  stock  and  $4,050,000  of  com- 
mon stock  were  to  be  paid  to  the  0A\Tiers  of  the  properties 
to  be  acquired,  leaving  $1,700,000  cash,  $2,950,000  in  bonds, 
$3,750,000  of  preferred  stock  and  $2,750,000  in  common 
stock.  Of  this  $1,500,000  in  cash  and  $1,500,000  of  bonds 
were  to  be  retained  in  the  treasury  of  the  proposed  com- 
bination for  working  capital.  This  left  $200,000  cash, 
$500,000  bonds,  $3,750,000  preferred  stock  and  $3,750,000 
common  stock — a  grand  total  of  $9,150,000,  figuring  the  se- 


FINANCIAL  AND  INDUSTRIAL  TRUSTS      297 

ciiritios  at  par  value— to  ^o  to  the  promoters.  From  it  they 
Avere  to  defray  the  expenses  of  promotion.  Before  tlie  con- 
stituent properties  were  purchased  however,  $400,000  cash 
was  added  to  this  profit  by  reducing  the  ag.c^re^^ate  price  to 
be  paid  for  constituent  companies  to  $6,000,000.  Tlie 
underwritiui;-  contract  was  with,  and  ran  to,  the  Mercantile 
Trust  Company. 

The  Trust  Company  of  the  Republic  was  asked  to  obtain 
$3,000,000  uiulorwriting  in  the  United  States  and  the  Mer- 
cantile Trust  Company  and  Alexander  &  Green  undertook 
to  obtain  $3,000,000  in  Paris  and  $3,000,000  in  London.  In 
a  letter  written  to  the  Trust  Company  of  the  Republic  later 
John  W.  Young  promised  that  its  compensation  should  be 
$67,000  in  cash,  $250,000  in  bonds,  $700,000  in  preference 
shares  and  $700,000  in  common  shares.  This  was  large 
bait,  and  it  was  swallowed,  hook,  line  and  sinker. 

From  this  time  on  Mr.  Dresser,  acting  for  himself  and 
for  his  company,  worked  with  Lewis  Nixon  in  assisting  the 
combination.  ^Mien  Young  sailed  for  Paris  he  left  his 
options,  which  were  made  to  Lewis  Nixon  as  trustee,  and 
gave  Mr.  Nixon  power  of  attorney  over  them.  Young  left 
also  a  tender  of  the  companies  on  which  he  held  options. 
Tlie  Trust  Company  of  the  Republic  desired  some  further 
tufonnation  than  was  contained  in  the  prospectus,  and  there 
was  sent  to  Mr.  Dresser  one  W.  T.  Simpson,  the  accountant 
upon  whose  figures  the  prospectus  was  based.  The  ac- 
countant apparently  succeeded  in  showing  ^Ir.  Dresser  and 
his  advisers  that  the  companies  to  be  taken  in  were  in 
good  condition  and  that  to  combine  them  was  desirable. 
The  Tnist  Company  of  the  Republic  then  took  up  the  favor- 
able consideration  of  the  tender  of  the  companies  which 
were  to  fonn  the  trust. 

By  the  tenns  of  the  underwriting  agreement,  the  $9,000,- 
000  of  bonds  were  to  be  underwritten  at  90,  and  each  under- 
writer was  to  receive  as  a  bonus  25  per  cent  of  his  under- 
writing in  each  kind  of  stock.     A  public  offering  was  to  be 


298  L.  WALTER  SAMMIS 

made  of  the  underwritten  bonds  at  97/4,  and  the  difference 
between  this  and  the  underwriting  price  was  to  be  shared 
pro  rata  among  the  miderwriters,  less  expenses  of  adver- 
tising, etc. 

Just  at  this  time  the  agitation  for  a  subsidy  on  Ameri- 
can-built ships  had  reached  its  height  and  the  measure  be- 
fore Congress  seemed  certain  to  succeed.  English  com- 
panies were  casting  something  more  than  longing  eyes  in 
the  direction  of  our  ship3^ards  in  consequence,  and  were 
making  substantial  efforts  to  form  such  a  combination  as 
Young  proposed.  On  the  surface,  with  two-thirds  of  the 
bonds  to  be  underwritten  abroad,  the  plan  seemed  certain 
of  success — and  the  profits  to  accrue  to  the  principals  in  the 
undertaking  were  most  enticing.  The  Trust  Company  of 
the  Republic  agreed  to  undertake  that  portion  of  the  labor 
assigned  to  it  and  obtain  $3,000,000  of  underwriting.  It 
did  this  the  more  willingly  since  word  had  been  received 
from  Young  in  Paris,  that  he  was  succeeding  and  that  the 
underwriting  allotted  to  the  French  capital  w^ould  be  com- 
pleted in  a  few  days. 

The  investing  and  speculating  public  had,  seemingly, 
recovered  tone  and  was  at  least  supposed  to  be  ready  to 
again  absorb  securities  of  industrial  combinations.  It  was 
not  apparent  at  that  time  that  the  market  was  in  the  condi- 
tion so  excellently  described  by  the  most  successful  reor- 
ganizer  the  country,  perhaps  the  world,  has  ever  seen — 
glutted  with  undigested  securities.  Promoters  and  under- 
writers alike  prophesied  an  easy  sale  of  the  bonds  and  a  cor- 
respondingly easy  reaping  of  profits. 

The  Trust  Company  of  the  Eepublic  performed  its 
share  of  the  labor  without  difficulty,  for  the  prospect  of  a 
large  bonus  of  stock  without  the  investment  of  a  dollar  ap- 
peals to  underwriters.  Indeed,  so  good  did  the  proposi- 
tion seem  that  $320,000  of  bonds  were  paid  for  by  the 
underwriters  and  withdra^vn  from  the  public  offering,  and 
$2,500,000  were  represented  to  have  been  sold  abroad. 


FINANCIAL  AND  INDUSTRIAL  TRUSTS      299 

When  Yoinio:  wont  to  Paris,  ostensibly  perhaps,  to  at- 
tend to  the  matter  of  the  Freneh  bank,  })ut  to  obtain  nnrler- 
writin^  for  the  Shipbuilding  Company,  lie  found  no  diffi- 
culty in  accomplishing  his  purpose  so  far  as  oV)taining 
names  was  concerned,  lie  had  been  in  Paris  before  on 
promotion  enterprises  and  had  among  his  ac(iuaintances  a 
certain  Baron  P.  Calvet-Rogniat.  Him  he  enlisted  in  the 
undertaking,  and  when  he  returned  to  New  York  in  the 
middle  of  May  he  brought  a  written  contract  in  which  the 
Baron  agreed  to  obtain  $3,500,000  of  underwriting  in 
France. 

Rogniat's  undertaking  was  as  follows: 

Paris,  May  7,  1902 
John  \V.  Young-,  Esq., 
Dear  Sir: 

In  consideration  of  the  premises  I  for  myself  and  as  the  representative  of 
a  group  of  financiers  headed  by  Mr.  Victor  Schrcyer,  hereby  undertake  and 
agree  to  obtain  the  signatures  of  said  group  of  substantial  underwriters  (who 
are  good  and  who  have  agreed  to  underwrite  the  same)  to  the  underwriting 
letter  of  the  United  States  Shipbuilding  Company,  a  copy  of  which  is  hereto 
attached,  dated  April  19,  1902,  to  the  full  amount  of  three  million  five  hun- 
dred thousond  dollars  of  the  bonds  of  said  company  on  or  before  May  21st 
properly  verified,  the  same  to  be  cabled  to  Messrs,  Alexander  &  Green,  120 
Broadway.  >s'ew  York  City,  on  or  before  that  date. 

I  also  undertake  and  agree  to  procure  either  the  withdrawal  of  said  bonds 
under  the  terms  of  said  underwriting  letter,  or  the  public  issue  of  said  bonds 
under  the  terms  of  said  letter  through  either  the  Franco-Swiss  Bank  of  Paris 
or  other  equally  substantial  bank,  simultaneously  with  the  public  issue  of  the 
said  company's  bonds  in  America,  it  being  understood  in  accordance  ^yith 
clause  one  of  said  underwriting  letter  that  this  agreement  shall  not  be  bind- 
ing upon  the  undersigned  unless  the  entire  amount  of  9,000,000  of  bonds  shall 
have  been  underwritten. 

Yours  truly. 

P.   CALVET-ROGXIAT. 

Rogniat  appears  to  have  obtained  this  underwriting 
and  more.  It  was  easy  for  him  to  do  this  because  what 
seemed  to  be  required  was  a  list  of  names  signed  to  the 
underwriting  agreement.  The  element  of  responsibility 
does  not  seem  to  have  been  so  closely  inquired  into. 

Representations  were  made  to  prospective  underwriters 
there  that  the  American  public  was  simply  wild  with  desire 
to  buy  the  securities  of  industrial  combinations,  and  that  all 
that  was  necessan^  was  a  list  of  names  with  amounts  set 
opposite  to  each  which  should  aggregate  $3,000,000;  that 


300  L.  WALTER  SAMMIS 

the  securities  would  find  a  ready  market  here,  and  that  the 
issue  of  $9,000,000  would  be  oversubscribed.  This,  it  was 
explained,  would  leave  the  underwriters  in  the  enviable 
position  of  taking  profits  without  investing  a  single  franc. 
This  is  usually,  of  course,  the  ideal  of  an  underwriter,  but 
it  is  customary,  even  in  Wall  Street,  for  an  underwriter  to 
be  able  to  meet  his  obligation. 

So  far  as  can  be  ascertained  few  substantial  Parisians 
placed  their  names  on  the  agreement.  Strenuous  efforts 
which  were  made  later  to  compel  these  underwriters  to  pay 
their  obligations  failed  absolutely,  except  that  the  Baron 
Eogniat  did  contribute  $25,000,  for  the  recovery  of  which 
amount  he  has  brought  suit  against  the  Mercantile  Trust 
Company.  A  total  of  $4,250,000  was  underwritten  in  this 
manner  in  the  French  capital  and  a  list  of  the  names 
obtained  was  forwarded. 

Mr.  Dresser  was  advised  that  because  of  the  coronation 
preparations  which  were  being  made  in  London  it  had  been 
found  impossible  to  conclude  arrangements  for  obtaining 
the  $3,000,000  of  underwriting  which  had  been  guaranteed 
from  the  English  capital.  Mr.  Dresser  was  asked  if  he 
would  undertake  to  obtain  here  an  additional  $1,750,000. 
The  list  sent  by  Rogniat  indicated  that  Paris  would  take 
$4,250,000,  which  left  only  $1,750,000  of  the  foreign  under- 
writing to  be  secured.  Mr.  Dresser  agreed  to  perform 
this  extra  work.  The  burden  was  being  shifted  gradually 
to  the  shoulders  of  the  Trust  Company  of  the  Republic. 
A  more  experienced  man  would  at  this  point  have  obtained 
this  or  washed  his  hands  of  the  entire  matter.  A  more 
astute  man  would  have  taken  alarm  at  the  too  evident  un- 
willingness of  the  other  trust  company  to  publicly  assume 
the  responsibility.  The  proposition  to  assign  the  under- 
writing to  the  Trust  Company  of  the  Republic  was  signif- 
icant. 

Under  these  conditions  the  bonds  of  the  United  States 
Shipbuilding  Company  were  offered  to  the  public  on  June 


FINANCIAL  AND  INDUSTRIAL  TRUSTS      301 

11,  1902.  Oil  tliat  (late  a  ])r(»sportvis  was  jjiihlislicd  in  tlic 
piil)Ii('  })rint  which  stated  what  was  not  true.  The  question 
whether  this  prospectus  was  authorized  by  the  Trust  Com- 
pany of  the  Republic  or  by  the  Mercantile  Trust  Company 
or  by  both  is  before  the  courts. 

The  prospectus  stated,  among  other  things,  that  the 
United  States  Shipbuilding  Company  had  been  organized 
under  the  laws  of  the  State  of  New  Jersey,  and  mentioned 
as  directors  a  nimiber  of  responsible  men.  It  goes  with- 
out saying  that  these  gentlemen  were  not  directors,  be- 
cause the  company  had  not  yet  been  fully  organized.  Some 
of  them  say  that  they  were  not  consulted  about  the  use  of 
their  names,  and  only  four  of  them  ever  served  as  directors 
when  the  company  was  organized  some  months  later.  The 
prospectus  went  on  to  say  that  Alexander  &  Green,  counsel 
for  the  new  company,  certified  as  to  the  validity  of  the  or- 
ganization and  of  the  securities  issued  and  the  title  of  the 
company  to  the  property  acquired.  It  stated  that  the 
plants  were  eaniing  $2,250,000  a  year  and  had  abundant 
facilities  for  additional  work  and  increased  earnings.  On 
June  18  the  books  were  opened  for  subscriptions  in  12 
cities  in  this  country  and  in  Paris,  and  the  fishermen  sat 
back  and  waited  for  the  public  to  take  the  bait. 

The  response  was  not  only  discouraging;  it  should 
have  been  fa^al.  The  public  sent  subscriptions  for  only 
$490,000  of  the  bonds.  This  was  again  a  period  where  the 
Trust  Company  of  the  Republic  should  have  thrown  the 
undertaking  overboard  and  charged  the  expense  it  had 
incurred  to  profit  and  loss.  The  public  did  not  rise  to  it, 
the  underwriters  did  not  want  it  or  they  would  have  taken 
their  bonds  before  they  were  offered  at  public  sale,  and 
the  whole  thing  was  flattening  out. 

Tlie  promoters  turned  to  Bethlehem  (not  in  the  scrip- 
tural sense)  for  salvation.^ 

On  June  12,  13  and  14,  1902,  :\rr.  Dresser  and  Mr. 
Nixon  discussed  with  Charles  M.  Schwab,  President  of  the 


302  L.  WALTER  SAMMIS 

United  States  Steel  Corporation,  the  advisability  of  acquir- 
ing the  Bethlehem  Steel  Company  for  the  Shipbuilding 
Company,  and  submitted  to  him  financial  statements  of  the 
Shipbuilding  plants,  their  resources,  liabilities  and  earn- 
ings. The  Bethlehem  Steel  Company  was  prosperous  and 
remuneratiye  and,  besides,  would  place  the  United  States 
Sliipbuilding  Company,  if  acquired  by  the  combination,  in 
the  enviable  position  of  being  able  to  build  armored  vessels 
and  thus  compete  for  government  work. 

Some  idea  of  the  value  and  importance  of  this  company 
can  be  learned  from  the  earning  capacity  of  the  property. 
At  the  time  of  its  transfer  to  the  Shipbuilding  Company, 
it  was  earning  at  the  rate  of  $1,500,000  a  year,  and  is  now 
earning,  I  am  infomied,  at  the  rate  of  $3,000,000  a  year. 
The  interest  charges  on  the  underlying  bonds  make  the 
only  fixed  charges  of  $557,500,  which  would  leave  sub- 
stantially, at  the  present  rate  of  earning,  for  distribution 
upon  the  securities  issued  on  account  of  that  property  5 
per  cent  on  the  $10,000,000  of  bonds,  6  per  cent  on  the 
$10,000,000  of  preferred  stock  and  14  per  cent  on  the  $10,- 
000,000  of  common  stock. 

Mr.  Schwab  asked  for  the  Bethlehem  Steel  Company 
$9,000,000  in  cash,  besides  a  certain  amount  of  securities. 
The  cash  was,  of  course,  out  of  the  question.  The  promot- 
ers had  peddled  all  the  securities  for  which  they  could  find 
a  market  and  did  not  see  their  way  clear  to  sell  outright 
bonds  against  the  Bethlehem  Steel  Company,  which  was  the 
only  way  in  which  they  could  raise  money  to  pay  the 
demand  of  Mr.  Schwab.  They  projDosed  therefore  to  pay 
for  the  Bethlehem  Steel  Company  with  securities  issued 
against  that  plant  itself.  Mr.  Schwab  told  them  that  Mr. 
J.  P.  Morgan,  who  was  then  in  Europe,  would  have  to  be 
consulted,  because  J.  P.  Morgan  &  Company,  as  managers 
of  another  syndicate,  held  the  stock  of  the  Bethlehem  Com- 
pany, and  were  entitled  to  participation  in  any  profit  real- 
ized from  such  a  sale.    Mr.  Morgan  was  communicated  with 


FINANCIAL  AND  INDUSTRIAL  TRUSTS      303 

by  cable  and  an  answer  was  rocoivod.  In  the  aftcnioon  of 
Juno  14,  1902,  iMr.  Nixon  and  Mr.  Dresser  closed  the  nego- 
tiations for  taking  the  Bethlehem  Steel  Company. 

Nixon  and  Dresser  agreed  that  Mr.  Schwab  sliould  re- 
ceive $10,000,000  collateral  mortgage  bonds  and  $10,000,- 
000  of  each  kind  of  stock,  .t:^0,000,000  in  all  at  par,  for  the 
capital  stock  of  the  Bethlehem  Steel  Company.  Later,  the 
common  stock  was  increased  by  an  additional  $5,000,000, 
which,  it  seems,  w^as  to  be  used  for  promotion  purposes.  By 
this  method  it  was  proposed  to  increase  the  capitalization  of 
the  company,  advertised  as  $20,000,000  with  $16,000,000 
bonded  indebtedness,  to  $45,000,000  stock  and  $26,000,000 
bonded  indebtedness. 

After  the  negotiations  for  the  Bethlehem  property  were 
concluded,  Mr.  Schwab  called  in  his  counsel,  jMr.  Max 
Pam,  to  prepare  the  necessary  contracts.  This  was  Mr. 
Pam's  first  connection  with  the  matter. 

On  June  17,  three  days  after  the  prospectus  w\as  pub- 
lished, the  United  States  Shipbuilding  Company  was  in- 
corporated in  New  Jersey  by  an  officer  and  two  employes 
of  the  Corporation  Trust  Company  for  $3,000.  These  men 
acted  as  directors  also,  taking  their  instructions  from  the 
promoters.  In  July  the  capital  of  the  company  was  in- 
creased to  the  amount  I  have  already  mentioned,  a  dummy 
board  of  directors  having  been  furnished  for  tliis  purpose. 

On  July  2,  Mr.  Nixon  and  Mr.  Dresser  went  to  ^Ir. 
Schwab's  office  to  sign  the  formal  agreement  under  which 
they  were  to  take  over  the  Bethlehem  Steel  Company.  They 
contracted  to  pay  to  J.  P.  Morgan  &  Company,  as  syndicate 
managers,  $7,246,871.48  in  cash  and  $2,500,000  of  each  kind 
of  stock  of  the  Shijobuilding  Company  for  the  299,910  shares 
of  the  Bethlehem  Company  which  were  held  by  J.  P.  ^[or- 
gan &  Comjoany  as  syndicate  managers.  This  was  the  en- 
tire issue  of  Bethlehem  stock,  with  the  exception  of  ninety 
shares.  The  par  value  of  each  share  was  $50.  In  order  to 
get  the  money  with  which  to  pay  J.  P.  Morgan  &  Company 


304  L.  WALTER  SAMMIS 

Mr.  Nixon  and  Mr.  Dresser  signed  with  Mr.  Schwab  an 
agreement  which  assured  to  them  this  cash  requirement. 
Under  this  agreement  Mr.  Schwab  contracted  to  furnish 
the  cash  necessarj^  to  acquire  the  stock  of  the  Bethlehem 
Steel  Company  and  to  accept  in  return  $10,000,000,  par 
value,  5  per  cent,  twenty  year  collateral  gold  bonds,  and 
$7,500,000  of  each  kind  of  stock  of  the  United  States  Ship- 
building Company.  The  mortgage  on  which  the  bonds 
were  to  be  issued  was  to  be  a  second  mortgage  lien  upon 
the  properties  of  the  Shipbuilding  Company  and  to  have 
a  voting  power  equal  to  the  same  amount  of  stock,  although 
the  first  mortgage  on  the  constituent  companies  was  not 
to  cover  the  Bethlehem  Steel  Company.  The  shares  of 
the  Bethlehem  Steel  Company,  acquired  thus  with  Mr. 
Schwab's  money,  were  to  be  deposited  mth  the  New  York 
Security  and  Trust  Company  as  security  for  the  mortgage; 
the  Shipbuilding  Company  was  required  to  guarantee  a 
dividend  of  6  per  cent  on  the  capital  stock  of  the  Bethle- 
hem Company,  to  provide  the  Bethlehem  Company  with 
work  sufficient  to  earn  this  dividend,  or  to  advance  the 
money  therefor,  and  to  see  that  the  Bethlehem  Company 
should  always  have  the  $4,000,000  working  capital  which 
it  then  claimed  to  have. 

It  was  also  agreed  that  the  holders  of  the  collateral 
bonds  in  the  absence  of  any  default  should  elect  a  full 
minority  of  directors  of  the  Bethlehem  Steel  Company. 
The  form  and  provisions  of  the  bonds  to  be  issued  under 
this  agreement  were  to  be  satisfactory  to  Mr.  Schwab  and 
his  counsel,  and  the  deal  was  not  to  be  concluded  until 
the  other  constituent  companies  had  been  duly  acquired 
and  paid  for. 

Mr.  Schwab  and  Mr.  Pam  have  been  criticised  severely 
for  making  the  terms  of  this  contract  stringent.  I  asked 
Mr.  Pam  recently  why  Messrs.  Nixon  and  Dresser  agreed 
to  the  terms  of  that  contract,  and  he  replied  that  the  terms 
of  the  contract  were  not  unreasonable,  that  they  were 


FINANCIAL  AND  INDUSTRIAL  TRUSTS      305 

intondod  to  protect  Mr.  Schwab  against  any  untoward 
coutin«;encics;  that  the  agreement  was  submitted  by 
Messi-s.  Nixon  and  Dresser  to  their  counsel  and  was  fully 
discussed  and  passed  by  him  before  lacing  signed  l)y  them; 
that  the  tenns  of  the  agreement  were  assented  to  and  the 
contract  signed  after  conference  and  negotiation  between 
himself  and  Messers.  Nixon  and  Dresser  and  Messrs. 
Alexander  &  Green,  who,  in  this  matter,  at  least,  w^ere 
acting  as  Nixon  and  Dresser's  counsel. 

Mr.  Alexander,  while  abroad,  had  gone  to  Paris  to  see  if 
any  money  could  be  collected  from  the  underwriters  there. 
He  found  them  averse  to  paying  anything.  In  the  first 
place,  they  said,  they  had  been  induced  to  underwrite  by 
being  told  that  payment  would  never  be  expected;  in  the 
second  place,  after  the  pitiful  failure  of  the  public  offer- 
ing, a  cable  was  sent  to  Paris  saying  that  the  public  issue 
was  a  success.  This  the  Paris  underwriters  interpreted 
as  meaning  that  the  entire  $9,000,000  of  bonds  had  been 
taken  by  the  public  and  that  nothing  remained  for  them 
to  do  except  to  take  their  profit.  They  refused  to  accept 
Mr.  Alexander's  explanation  that  it  was  the  custom  in 
this  country  to  call  an  issue  a  success,  no  matter  how  badly 
it  had  failed,  and  to  peddle  the  bonds  afterwards.  The 
best  Mr.  Alexander  was  able  to  accomplish  was  to  get  the 
Frenchmen  to  give  their  notes  for  the  amounts  they  had 
underwritten.  These  notes  were  to  mature  on  October  6. 
That  the  French  underwriting  was  nil  was  not,  however, 
admitted  by  the  contracting  parties.  It  was  still  carried 
as  a  good  asset  and  counted  in  as  part  of  the  underwriting. 

Nevertheless,  IMr.  Alexander  seems  to  have  sent  written 
and  cabled  assurances  of  the  bona  fides  of  the  French 
underwi-iting.  His  opinion  seemed  to  be  that  it  would  be 
paid  and  that  it  was  delayed  only  on  account  of  details. 
He  represented  liimself  to  the  Paris  lianking  community  as 
counsel  for  the  Mercantile  Trust  Company  in  this  matter 
and  instmcted  them  about  the  transfer  of  funds  to  New 

B— II— 20 


806  L.  WALTER  SAMMIS 

York  when  payments  should  be  made,  and  also  in  regard 
to  other  details  of  the  transaction,  as  their  counsel.  Assur- 
ances were  received  from  Paris,  and  from  time  to  time 
reiterated,  that  the  money  from  the  French  underwriters 
w^ould  be  forthcoming. 

On  the  23d  day  of  July,  1902,  by  cable,  the  French  un- 
derwriting was  called. 

The  calls  were  made  by  cable  to  avoid  legal  complica- 
tions under  French  laws.  The  following  cable  atfords  an 
example  of  all: 

"July  23,   1902. 
"Odero, 

C/o  Panta  (the  cable  address  for  Rogniat),  Paris.  _ 

Have  allotted  you  $8,000  bonds  of  the  Shipbuilding  underwriting.  Pay 
Morgan  &  Harjes  twenty-five  per  cent  on  allotment  July  twenty-fifth.  Upon 
payment  we  will  issue  negotiable  receipt  in  New  York  to  your  order. 

MERCANTILE  TRUST  CO." 

The  American  underwriters  had  responded  promptly  to 
the  call,  and  an  inquiry  from  New  York  as  to  why  Paris 
did  not  pay  brought  the  following: 

"Paris,  July  25th,  1902. 
"McCook,  N.  Y.       . 

All  I  hear  indicates  general  response.  Short  notice  creates  slight  delay. 
Appreciate  money  must  be  in  New  York  before  August.  Underwriters  con- 
template simultaneous  payment.    Have  payments  been  made  New  York. 

(Signed)  Beatty." 

(McCook  was  the  cable  address  for  Alexander  &  Green,  and  Beatty  was 
the  cable  address  of  C.  B.  Alexander.) 

On  the  5th  of  August,  1902,  matters  were  approaching 
a  crisis  and  the  following  was  sent: 

"New  York,  August  5,  1902. 
"Oppenheim,  Young  and  Mayer, 
C/o  Trebor,  Paris. 
Can  you  not  give  us  an  exact  statement  of  the  present  conditions  of  pay- 
ments by  underwriters  each  for  twenty-five  per  cent    due  July  twenty-fifth  and 
August  first  respectively,  and  when  cash  remittances  will  be  actually  paid.    We 
must  know  on  account  of  commitments   here,  and   so  far  have   nothing  ex- 
cept promises.     Where  is  the  hitch  and  why  the  continued  delay  after  every- 
thing so  far  as  we  can  gather  from  your  cables,  is  settled. 

Republicus  McCook  Nixon." 

Finally,  on  the  7th,  the  following  cable  was  sent 
to  Yoimg: 

"New  York,  August  7,  1902. 
"Young, 

C/o  Trebor,  Paris. 
We  are  getting  tired  of  promises  to  pay  tomorrow.     We  must  rnake  our 
payments  here  and  must  have  French  money  to  do  it  with.  Republicus," 


FINANCIAL  AND  INDUSTRIAL  TRUSTS      307 

The  following  cables  further  explain  the  situation: 

"New  York,  AuRUst  8,  1902. 
"Calvct  Ro).jniat, 

C/o  Trchor,  Paris. 
Monday  last  day  for  closing  Bethlehem.     All  other  plants  must  be  paid 
for   before  closinR   this   transaction.      It   is   absolutely   essential   to   have   your 
money  in  New  York  Saturday.  Republicus." 

"New  York,  AuKust  11,  1902. 
"Calvet   Ropniat. 

C/o  Trebor,  Paris. 
No   payments    received   to-day  from   French    underwriters.      Please    cable 
immediately  when  money  is  to  be  in  New  York. 

Republicus." 

"Paris,  August  12,  1902. 
"Republicus,  N.  Y. 

Rogniats   Russian   returns   delayed   yesterday;   learn  part   arrived;   he   and 

others  pay  today;   Schreyer  and  all  seem  now  ready  to  pay.     Know  nothing 
of  second  call.     Have  wired  Alexander  to  come  here. 

Our  persuasion  and  his  iron  hand  in  velvet  glove  of  course  will  bring 
desired  results.  Young." 

And  finally  we  have  this  significant  suggestion  by  cable; 

"St.   Moritz,   August  13,  1902, 
"McCook,  (Alexander  &  Green,  N.  Y.) 

Suggest  Mercantile  assign  to  Shipbuilding  Company  call,  who  can  sue  or 
to  Republicus   with  consent  of  Shipbuilding  Co.  Alexander." 

As  late  as  September  8th  the  theory  was  still  current 
that  there  would  be  results  from  the  French  underwnting. 

About  the  6th  of  October,  1902,  Mr.  Dresser  arrived  at 
Paris  and  within  a  few  days  after  his  arrival  cabled  to  the 
Trust  Company  of  the  Republic  that  the  French  under- 
writing was  valueless.  ]\Ir.  Dresser's  opinion  of  the  French 
underwriting  was  expressed  in  much  stronger  language 
than  this. 

The  relation  of  the  ^lercantile  Trust  Company  of  New 
York  must  not  be  overlooked  in  this  transaction.  It  was 
the  party  of  the  fii"st  part  to  the  underwriting  agreements, 
and  the  trustee  of  the  bond  issue.  It  was,  as  I  have  already 
stated,  the  first  financial  institution  having  announced  pub- 
lic relations  with  the  Shipbuilding  undertaking. 

Tlie  prospectus  showed  that  there  w(nild  be  an  issue 
of  $16,000,000  of  bonds  secured  by  a  first  mortgage  upon 
the  Shipbuilding  Company's  plants,  of  which  bonds  and 
mortgage  the  Mercantile  Trust  Companj^  acted  as  trustee, 


308  L.  WALTER  SAMMIS 

and  the  bonds  were  not  valid  and  were  not  subject  to  issue 
or  use  until  each  bond  was  properly  certified  by  the  trus- 
tee, and  were  issuable  only  on  its  counter  signature  as 
trustee. 

On  June  24,  1902,  John  W.  Young  undertook  to  trans- 
fer and  sell  to  the  Shipbuilding  Company  these  various 
shipbuilding  and  other  properties,  with  a  certain  amount 
of  cash,  and  his  payment  was  to  come  from  the  issue  of 
$16,000,000  of  first  mortgage  bonds,  of  which  $1,500,000 
were  to  remain  in  the  treasury. 

The  Shipbuilding  Company  did  not  acquire  title  to  the 
shipbuilding  plants  until  the  11th  of  August,  and  up  to 
that  time  no  bonds  were  apparently  deliverable  on  any 
account  whatever.  Any  issue  of  the  bonds  prior  to  that 
time  seems  strange  to  the  uninitiated. 

That  the  Mercantile  Trust  Company  had  legal  title  to 
the  bonds  themselves,  or  had  any  interest  therein,  does  not 
appear  to  be  the  fact.  The  only  apparent  interest  on  the 
part  of  this  trust  company  was  its  compensation  as  trustee. 

On  the  11th  day  of  August,  when  the  Bethlehem  prop- 
erties were  to  be  turned  over,  the  promoters  of  the  Ship- 
building enterprise  were  facing  a  crisis.  Under  the  con- 
tract for  the  sale  of  the  Bethlehem  property  it  was  pro- 
vided that  the  original  properties  of  the  Shipbuilding  Com- 
pany should  not  only  be  acquired,  but  the  title  vested  in 
the  Shipbuilding  Company,  and  this  required  the  payment 
of  $6,000,000,  besides  the  possession  of  a  cash  working 
capital  of  $1,500,000. 

The  provisions  of  the  agreement  showing  the  caution 
exercised  in  behalf  of  Mr.  Schwab,  to  assure  the  full  com- 
pliance with  these  conditions  and  to  assure  the  good  faith 
of  the  transactions  before  the  Bethlehem  was  turned  over, 
are  as  follows: 

"At  the  time  of  the  said  purchase  of  said  shares  of  stock  of  the  Bethlehem 
Steel  Company  by  said  Nixon  and  Dresser  and  the  sale  to  said  Schwab  of  the 
bonds,  preferred  stock  and  common  stock  to  be  issued  by  said  Shipbuilding 
Company,  as  herein  provided  for,  said  Shipbuilding  Company  shall  have  duly 


FINANCIAL  AND  INDUSTRIAL  TRUSTS      309 

purchased  and  become  possessed  of  the  property  and  assets  or  the  capital  stock 
or  both  of  said  'Subsidiary  Companies.' 

"Said  Nixon  and  Dresser  shall  furnish  the  certificates  of  Messrs.  Alex- 
ander &  Green.  Counsel  for  said  Shipbuilding  Company,  and  the  other 
parties  financially  in  interest  in  such  form  as  shall  he  satisfactory  to  said 
Schwab,  of  the  validity  of  the  organization  of  the  said  Shipbuilding  Company, 
of  the  acquisition  by  it  of  the  properties,  plants  and  assets  or  capital  stock 
or  both  of  said  'Subsidiary  Companies,'  of  the  acquisition  by  it  of  said  stock 
of  the  said  Bethlehem  Steel  Company,  of  the  issuance  of  full  paid,  non-as- 
sessable shares  of  preferred  stock  and  common  stock  of  the  Shipbuilding 
Company  to  be  delivered  to  said  Schwab  under  this  agreement,  and  of  the 
validity  thereof,  and  of  the  authorization  and  issue  of  the  stocks  and  bonds  of 
the  Shipbuilding  Company,  together  with  satisfactory  evidence  of  the  con- 
sent and  authority  of  all  parties  in  interest,  for  the  issue  of  the  said  stocks 
and  bonds  of  said  Shipbuilding  Company,  as  herein  provided  for." 

To  summarize,  it  was  insisted  in  behalf  of  Mr.  Schwab 
that  the  Bethlehem  Company  should  not  come  into  the 
combination  until  the  other  properties  had  been  acquired 
and  paid  for,  the  titles  vested  in  the  Shipbuilding  Company 
and  the  considerations  for  the  issuance  of  the  various  se- 
curities properly  received. 

The  necessary  certificate  of  Alexander  &  Green  was 
furnished  to  both  J.  P.  Morgan  &  Co.  and  Mr.  Schwab, 
as  shown  by  the  evidence  taken  before  ^Ir.  Oliphant, 
United  States  Conmiissioner,  in  the  Shipbuilding  hearing. 

A  cable  to  Young,  in  Paris,  on  August  8th,  said: 

"Under  our  contract  to  purchase  Bethlehem,  which  must  be  consummated 
^^onday.  we  have  to  have  all  other  plants  fully  paid  for  and  transferred  to 
Shipbuilding  Company  first.  This  means  all  cash  must  be  in  hand  Saturday, 
entirely  irrespective  of  date  of  option.  There  is  a  serious  danger  in  Bethle- 
hem matter  as  they  will  give  no  extension  of  time.  Republicus." 

How,  then,  was  the  money  to  be  raised?  It  was  sug- 
gested that  iMr.  Dresser  take  Shipbuilding  bonds  which  it 
would  seem  were  in  the  possession  of  the  Mercantile  Tinist 
Company,  presumably  as  tnistee,  and  obtain  loans  on  them 
from  various  institutions. 

Dresser  and  Nixon  got  some  loans,  but  they  were  unable 
to  get  enough.  Therefore,  Dresser  arranged  with  several 
different  institutions  for  deposits  of  the  Trust  Company 
of  the  Republic's  funds,  and  then  they  borrowed  the 
amount  of  this  money  individually,  placing  with  the  loan- 
ing institution  an  amount  of  Shipbuilding  bonds,  double 
the  amount  borrowed,  giving  their  joint  notes  and  the 


aiO  L.  WALTER  SAMMIS 

guaranty  of  the  Trust  Company  of  the  Republic  signed 
by  D.  LeRoy  Dresser,  President. 

Some  of  these  loans  were  on  the  books  of  the  Trust 
Company  of  the  Republic,  but  new  loans  were  not  at  first 
all  put  upon  the  books  of  the  Trust  Company  of  the  Re- 
public as  an  indebtedness  of  the  Trust  Company,  but  were 
entered  as  contingent  liabilities,  and  some  were  carried  as 
assets. 

In  one  instance,  five  hundred  thousand  dollars  were  de- 
posited in  a  trust  company  by  Mr.  Dresser  as  an  interest- 
bearing  deposit,  a  credit  to  the  Trust  Company  of  the  Re- 
public. Five  hundred  thousand  dollars  were  borrowed 
from  this  same  trust  company  by  Mr.  Dresser  upon  $1,000,- 
000  of  Shipbuilding  bonds  furnished  by  the  Mercantile 
Trust  Company,  accompanied  by  the  joint  note  of  ^ir. 
Nixon  and  Mr.  Dresser  and  a  guaranty  executed  by  Mr. 
Dresser  in  the  name  of  the  Trust  Company  of  the  Repub- 
lic. All  of  this  was  done,  according  to  the  testimony,  in 
the  branch  office  of  the  Trust  Company  of  the  Republic  at 
71  William  Street,  N.  Y.  City,  and  the  minutes  of  the  Trust 
Company  of  the  Republic  do  not  show  that  the  transac- 
tions were  at  the  time  done  with  the  knowledge  of  the 
Board  of  Directors. 

Mr.  Nixon  and  Mr.  Dresser  then  took  the  check  of  the 
other  trust  company,  to  the  order  of  Nixon  and  Dresser, 
and  deposited  it  in  the  Trust  Company  of  the  Republic 
to  the  credit  of  the  loans  of  Nixon  and  Dresser. 

There  was  a  failure  to  observe  proper  banking  methods. 

The  Knickerbocker  Trust  Company  seems  to  have  de- 
clined to  loan  on  Dresser's  and  Nixon's  notes  with  the 
collateral  of  the  Shipbuilding  bonds,  and  required  ad- 
ditional collateral.  It  therefore  obtained  the  following 
assignment: 

"Know  all  Men  by  these  Presents,  that  the  Mercantile  Trust  Company, 
a  corporation  of  New  York,  hereby  releases  to  the  United  States  Shipbuilding 
Company  (a  corporation  of  New  Jersey),  its  successors  or  assigns,  all  the  right, 
title  and  interest  of  said  Mercantile  Trust  Company  in  and  to  certain  under- 


FINANCIAL  AND  INDUSTRIAL  TRUSTS      311 

writinp:  aRTccnicnts  relative  to  the  I"i^>^t  Mortjjam-  l-ive  IVt  (cut  Sinkinjc 
Fund  Gold  Bonds  of  the  said  SliiiibuildinK  Company,  hcrct(j  annexed,  and 
respectively  executed  by  the  following  named  Subscribers,  for  the  amount  of 
bonds  set  opposite  their  names,  to  wit:" 

(ITcrc  follow  the  naiiu's  of  underwriters  and  underwrit- 
ings  amounting  to  $1,400,000.) 

"The  Mercantile  Trust  Company  licrcby  certifies  to  the  ?aid  United 
States  Shipbuildinj;  Company  and  to  each  and  every  person  who  may  succeed 
to  the  title  and  interest  of  said  Shipbuilding  Company  in  and  to  any  of  said 
underwriting  agreements  that  the  entire  amount  of  nine  million  dollars  ($9,- 
000,000)  of  bonds  was  underwritten  as  provided  in  Condition  No.  1,  in  said 
agreements. 

Dated  August  11,  1902. 

Mercantile   Trust    Company, 
By  A.  Vy.  Krech. 
"In  the  presence  of  Vice  President." 

W.  \V.  Green." 

The  condition  No.  1  referred  to  in  the  said  certifieate 
refers  to  the  provision  of  the  underwriting  agreement  that 
no  underwriter  shall  be  called  upon  to  pay  until  the  entire 
Jf:9,000,000  is  subscribed. 

This  assignment  was  accompanied  by  a  transfer  by  the 
Shipbuilding  Company,  signed  by  James  Duane  Living- 
ston, Second  Vice-President,  to  Le^^is  Nixon  and  D.  Le- 
Roy  Dresser,  which  contained  this  recital: 

"Lewis  Nixon  and  D.  LeRoy  Dresser  arc  about  to  borrow  from  Knicker- 
bocker Trust  Company  the  sum  of  seven  hundred  thousand  dollars  (.$700,000), 
and  to  assign  as  collateral  security  therefor  the  above  described  underwriting 
agreements  to  the  extent  of  the  unpaid  liability  of  the  subscribers  thereon, 
together  with  the  First  Mortgage  Five  Per  Cent  Sinking  Fund  Gold  Bonds  of 
the  Shipbuilding  Company  to  the  amount  in  par  value  of  $1,000,000  and 
Preferred  stock  of  the  Shipbuilding  Company  to  the  amount  of  4.000  shares 
and  Common  stock  of  the  Shipbuilding  Company  to  the  amount  of  4,000 
shares." 

Upon  these  two  documents  was  endorsed  a  second  as- 
signment in  the  following  language: 

"For  value  received  we  assign,  transfer  and  set  over  to  the  Knickerbocker 
Trust  Company  all  our  right,  title  and  interest  in  and  to  the  foregoing  instru- 
ment, and  in  the  underwriting  agreements  therein  mentioned. 
Dated  August  11.  1902. 

Daniel   T.eRoy  Dresser, 
Lewis  Nixon." 
"In  the  presence  of 

Brainard  Tolles." 

In  view  of  the  French  situation  tlie  effect  of  the  certifi- 
cate of  the  Mercantile  Trust  Company  that  the  entire 
$9,000,000  had  been  underwritten  is  not  quite  clear. 


312  L-  WALTER  SAMMIS 

A  psychological  study  of  Mr.  Dresser's  mental  condi- 
tion at  this  time  would  be  interesting  if  it  would  not  be 
pitiful.  He  was  the  head  of  a  trust  company  which  had 
been  doing  business  for  less  than  six  months.  Its  oppor- 
tunities at  the  start  were  almost  boundless,  and  its  stock, 
issued  at  150,  was  quoted  around  370.  A  high  place  in  the 
financial  world  was  open  to  Mr.  Dresser  himself  as  the 
president  of  this  company,  but  because  of  his  ambition  to 
make  money  in  large  sums,  regarding  thousands  as  too 
small  to  be  considered  and  thinking  only  in  millions,  he 
had  not  only  thrown  away  his  opportunity,  but  was  in  dan- 
ger of  wrecking  his  company.  Personally  he  had  no  ex- 
tensive credit  upon  which  to  draw  if  he  had  desired  to 
assume  the  responsibility  for  the  large  sum  necessary  to 
purchase  the  constituent  companies.  He  had  reached  the 
end  of  his  resources.  He  had  exhausted  the  resources  of 
the  Trust  Company  of  the  Republic.  Both  were  in  danger, 
and  he  knew  it.  The  responsibility  had  been  skillfully 
shifted  upon  his  shoulders.  No  help  seemed  forthcoming 
from  the  originators  of  the  undertaking.  The  promises  of 
the  promoters  as  to  French  financial  returns  were  becom- 
ing shadowy.  In  this  predicament  he  sought  Mr.  Schwab's 
counsel,  Mr.  Schwab  being  in  Europe  at  the  time.  Mr. 
Pam  took  Mr.  Dresser  over  to  the  office  of  J.  P.  Morgan 
&  Co.  and  introduced  him  to  Mr.  Perkins. 

Mr.  Dresser  requested  a  loan  of  $2,500,000,  but  Mr. 
Perkins  said  he  could  not  make  loans  on  Shipbuilding  se- 
curities. Mr.  Dresser  said  that  he  and  his  associates  were 
expecting  to  receive  remittances  in  a  week  or  ten  days 
from  the  French  underwriting  and  would  need  the  assis- 
tance only  that  long.  The  evidence  is  that  Mr.  Perkins 
was  told  the  proceeds  of  the  French  underwriting  would 
not  long  be  delayed.  Mr.  Dresser  called  again  the  next 
day  and  told  Mr.  Perkins  that  several  financial  institutions 
would  be  willing  to  assist  them  if  they  could  have  the  addi- 
tional funds,  and  again  requested  a  loan* 


FINANCIAL  AND  INDUSTRIAL  TRUSTS      313 

'Mr.  Perkins  was  unwilling  to  make  a  loan,  ])nt  ho  did 
finally  say  that  he  would  deposit  $2,100,000  in  any  three 
responsible  trust  companies  Mr.  Dresser  might  name  for 
ten  days  or  two  weeks. 

Mr.  Dresser  mentioned  the  Knickerbocker  Trust  Com- 
pany, the  Tnist  Company  of  the  Republic  and  the  Man- 
hattan Tiiist  Company. 

The  Manhattan  Trust  Company  did  not  accept  a  deposit. 
The  other  two  companies  did  receive  $1,400,000,  issuing 
their  certificates  of  deposit  to  J.  P.  Morgan  &  Co.,  and  lent 
this  amount  to  Mr.  Nixon  and  Mr.  Dresser. 

Mr.  Perkins  introduced  Mr.  Dresser  to  the  New  York 
Security  &  Trust  Company,  which,  it  is  said,  made  a  loan 
to  Dresser  and  Nixon  of  $350,000,  making  the  total  assist- 
ance secured  in  that  way  $1,750,000. 

The  $1,750,000  thus  borrowed,  while  it  was  a  great  help, 
was  not  sufficient  to  place  the  promoters  in  a  position  to 
buy  the  properties  for  which  they  held  options.  They  were 
still  short  of  the  necessary  cash  requirements.  But  the 
Trust  Company  of  the  Republic  had  more  than  $4,000,000 
in  deposits. 

Methods  similar  to  these  were  taken  with  other  institu- 
tions, until,  in  the  joint  names  of  Mr.  Nixon  and  ^Ir.  Dres- 
ser, secured  by  the  guaranty  of  the  Tnist  Company  of  the 
Republic  issued  by  Mr.  Dresser,  and  the  Shipbuilding  col- 
lateral furnished  by  the  Mercantile  Trust  Company,  some 
millions  were  raised,  sufficient  to  draw  the  checks  to  the 
vendors,  which  checks  aggregated  $6,000,000. 

To  lend  this  to  its  own  president  would  be  an  irregu- 
larity too  flagrant  not  to  attract  undesired  attention  at 
some  time  or  other,  so  the  Trust  Company  of  the  Republic 
made  loans  to  Mr.  Nixon,  accepting  therefor  his  note  se- 
cured by  bonds  and  stock  of  the  Shipbuilding  Company, 
whose  entire  assets  consisted  of  Young's  offer  to  sell  the 
Shipbuilding  plants,  which  it  could  not  take  up  for  lack 
of  funds. 


314  L.  WALTER  SAMMIS 

The  Trust  Company  of  the  Republic  had  received  from 
imderwriters  and  subscribers  $2,327,812.50,  of  which  it  had 
contributed  $250,000  of  its  own  money.  It  had  lent  di- 
rectly to  Mr.  Nixon  and  Mr.  Dresser,  or  supported  their 
notes  by  its  guaranties,  $3,672,187.50. 

Under  these  conditions  the  fateful  day  for  paying  for 
the  properties  arrived.  The  Trust  Company  of  the  Re- 
public prepared  twenty-four  checks,  aggregating  $6,000,- 
000,  fifteen  of  which  were  made  out  to  the  order  of  Lewis 
Nixon,  and  the  latter,  as  holder  of  the  options  through 
Young's  power  of  attorney,  delivered  the  checks  to  Col. 
McCook  and  Mr.  Young  for  the  owners  of  the  constituent 
companies.  Besides  this  cash,  the  vendors,  of  whom  Mr. 
Nixon  was  one,  were  supposed  to  receive  $4,050,000  in 
bonds  and  $4,000,000  in  each  kind  of  stock.  ,. 

The  great  Shipbuilding  Company  was  now  an  accom- 
plished fact  with  the  exception  of  taking  over  the  Bethle- 
hem. 

This  latter  transaction,  which  was  performed  on  August 
12th,  though  of  vast  importance,  was  very  simple.  Mr. 
Nixon  and  Mr.  Dresser  met  the  various  parties  in  interest 
in  the  office  of  J.  P.  Morgan  &  Co.,  and  there  received  the 
stock  of  the  Bethlehem  Steel  Company,  paying  for  it 
with  Mr.  Schwab's  check  for  $7,246,871.48  and  passing 
over  $10,000,000  collateral  mortgage  bonds,  $10,000,000  of 
preferred  stock  and  $10,000,000  of  common  stock,  of  which 
$2,500,000  of  each  kind  of  stock  was  delivered  to  J.  P. 
Morgan  &  Co.  as  syndicate  managers.  It  remained  only  for 
the  new  holders  of  the  Bethlehem  stock  to  deposit  it  with 
the  New  York  Security  and  Trust  Company  as  security 
for  the  collateral  mortgage.  This  they  did  without  delay. 
It  is  not  my  intention  to  follow  the  fortunes  of  the 
United  States  Shipbuilding  Company  to  their  conclusion. 
It  is  clear,  however,  from  the  disclosure  of  the  facts,  that 
with  the  exception  of  the  Bethlehem  Steel  Company,  the 
Union   Works   and   the   Hyde   Windlass   Company,   the 


FINANCIAL  AND  INDUSTRIAL  TRUSTS      315 

constituent  companies  were  indebted  far  ])eyond  their 
ability  to  pay,  and  the  new  trust  was  without  the  earning 
capacity  to  meet  the  heavy  fixed  cliarp^es  fastened  upon 
it  by  the  promoter'  issue  of  $16,000,000  of  bonds  against 
these  properties.  The  subsequent  faihu-e  and  fall  of  the 
company  was  inevitable,  no  matter  who  was  in  charge  of 
its  affairs  or  how  efficient  its  management. 

I  have  devoted  many  weeks  to  the  examination  of  the 
evidence,  documents  and  facts  in  connection  with  the  en- 
tire matter,  and  have  carefully  and  thoroughly  informed 
myself  from  all  sources  of  information  with  reference 
thereto,  and  find  that  neither  ^Iv.  Schwab  nor  Mr.  Pam 
appear  anywhere  to  have  had  any  connection  with  the  pro- 
motion, organization  or  financing  of  the  Shipbuilding  en- 
terprise or  the  various  transactions  in  connection  there- 
with. 

Whether  in  view^  of  this,  the  criticism  of  Mr.  Schwab  in 
securing  for  himself  so  large  a  consideration  for  the  Beth- 
lehem Steel  Company  stock  is  justified,  considering  that  he 
is  the  only  one  who  received  no  cash  for  his  property,  but 
took  his  entire  pay  in  securities,  is  not  for  me  to  say,  nor  is 
it  my  province  to  comment  on  the  criticism  and  complaint 
made  against  his  counsel,  Mr.  Pam,  for  his  faithfulness  in 
protecting  his  client's  interests  in  the  preparation  of  the 
contract  and  mortgage,  the  terms  of  which  have  been  re- 
garded by  some  as  tight  and  as  exacting  too  much  security. 
It  was  Mr.  Pam's  effort  to  safeguard  and  protect  his 
client's  interests  against  any  unforeseen  contingencies. 

It  is  well,  however,  to  continue  with  the  Tnist  Com- 
pany of  the  Republic  until  the  final  effect  of  its  operations 
has  been  shown.  The  parties  in  interest  must  have  fairly 
groaned  with  relief  when  the  properties  were  paid  for, 
although  the  methods  ])y  which  they  accom]ilished  this  re- 
minds one  rather  of  the  shiftless  Micawbcr  than  of  any 
other  person  or  thing  in  fiction  or  in  history. 

It  must  also  be  borne  in  mind  that  this  transaction  was 


316  L.  WALTER  SAMMIS 

all  completed  in  a  short  space  of  time  and  during  the 
months  of  July  and  August  of  the  summer  of  1902,  when 
there  were  few  if  any  meetings  of  the  Board  of  Directors 
of  the  Trust  Company  of  the  Republic.  In  fact,  it  is  evi- 
dent that  Mr.  Dresser,  as  President  of  the  Trust  Company 
of  the  Republic,  treated  this  trust  company  as  if  it  were 
the  firni  of  Dresser  &  Company  and  he  was  at  its  head. 
The  transactions  were  not  entered  upon  the  minute-book  of 
either  the  Executive  Committee  or  the  Board  of  Directors. 
Dresser  and  Nixon  seemed  to  act  upon  Micawber's  theory 
that  if  the  money  was  raised  and  the  properties  were  paid 
for  it  was  of  no  importance  what  obligations  were  under- 
taken to  secure  the  money.  Proceeds  of  the  French  under- 
writing were  to  cure  all  ills  and  to  cover  all  sins  of  omis- 
sion and  commission. 

The  troubles  of  the  unfortunate  Trust  Company  of  the 
Republic  were  just  beginning.  The  French  underwriting 
produced  not  a  dollar.  The  mouse,  as  a  result  of  the 
mountain's  labor,  was,  compared  with  the  result  of  the 
French  underwriting,  magnificent,  but  not  sufficient.  Dres- 
ser's ambition  to  organize  a  gigantic  trust  had  been  satis- 
fied, but  in  the  process  the  capital,  surplus  and  deposits 
of  the  Trust  Company  of  the  Republic  had  been  nearly 
wiped  out  and  it  was  in  an  exceedingly  precarious  position. 
Only  immense  success  on  the  part  of  the  creature  it  had 
made  could  save  it  from  the  fate  of  Frankenstein.  It  had 
gambled  on  the  result  of  the  French  underwriting  and  had 
lost.  Although  the  great  Shipbuilding  Company  had  been 
launched  and  the  required  $1,500,000  of  working  capital 
credited  to  the  United  States  Shipbuilding  Company  on 
the  books  of  the  Trust  Company  of  the  Republic  as  of 
August  12th,  the  funds  therefor  were  lacking  to  meet  its 
drafts.  It  became  necessary  to  provide  that  amount. 
Armed  with  guaranties  signed  by  Dresser  in  the  name  of 
the  Trust  Company  of  the  Republic  and  a  vast  amount  of 
Shipbuilding  securities,  Mr.  Nixon  and  Mr.  Dresser  bor- 


FINANCIAL  AND  INDUSTRIAL  TRUSTS      317 

rowed,  on  August  30  and  Septoni])cr  4  and  5,  1902,  $1,500,- 
000  from  Now  York  banks  on  their  notes,  secured  in  what 
had  now  become  the  usual  manner. 

The  returns  from  the  American  underwriters  and  sub- 
scribers were  applied  to  tlie  reduction  of  the  o})li^ati<nis 
of  Mr.  Nixon  and  Mr.  Dresser.  They  brought  the  t(jtal 
in  which  they  were  indebted  to  the  Tnist  Company 
of  the  Republic  down  to  $3,279,909,  to  repay  which 
they  had  nothing  more  substantial  in  sight  than  the  French 
underwriting.  This  amount  w^as  afterwards  reduced  to 
$982,334.10. 

At  this  point  the  bank  examiner  visited  the  Trust  Com- 
pany of  the  Republic.  Its  difficulties  were  not  a  matter  of 
general  knowledge,  and  it  was  esteemed  a  most  prosperous 
institution.  Its  warehouse  business  in  the  South  was 
growing  at  a  phenomenal  rate,  the  newspapers  were  filled 
with  tales  of  its  progress  and  its  brilliant  prospects  in  an 
almost  virgin  field.  But  when  the  state  bank  examiner 
finished  his  inspection  the  world  was  informed  of  the  almost 
inextricable  tangle  it  had  got  into  through  its  connection 
with  the  Shipbuilding  Trust,  and  its  stock  dropped  to  be- 
low par. 

At  this  critical  juncture  a  syndicate,  which  became 
Ivuown  as  the  Sheldon  Syndicate,  was  fonned  to  take  over 
the  financial  obligations  of  the  Trust  Company  of  the 
Republic,  accepting  in  payment  therefor  securities  of  the 
Shipbuilding  Trust.  The  Syndicate  did  take  over  these 
obligations  and  thus  relieved  in  part  the  situation.  Even 
then,  had  the  Shipbuilding  Company  been  established  upon 
a  sound  basis,  or  had  it  even  acquired  properties  wiiich, 
exclusive  of  the  Bethlehem,  were  sound  and  self-support- 
ing, the  Trust  Company  of  the  Republic  would  have  won 
its  way  clear  financially.  But  since  the  Shipbuilding  Com- 
pany was  itself  insolvent  and  a  failure,  it  was  not  possible 
for  the  Tnist  Company  of  the  Republic  to  realize  on  the 
securities  which  it  held  of  the  combination  and  thus  replace 


318  L.  WALTER  SAMMIS 

tlie  large  amount  in  which  it  was  involved.    Its  reputation, 
too,  had  been  sacrificed. 

It  was  reorganized  and  is  today  only  a  memory,  and 
its  history  only  a  contention  in  the  courts. 

Do  not  for  one  moment  assume  that  I  have  covered 
the  whole  question  of  the  relation  of  the  trust  company  to 
the  industrial  combination,  and  not  even  the  whole  ques- 
tion as  to  the  relation  of  these  two  trust  companies  to  the 
Shipbuilding  Corporation.  On  the  contrary,  I  have  care- 
fully avoided  discussion  of  certain  topics  which  may  be  the 
subject  of  litigation,  and  I  have  touched  only  so  far  as  was 
necessary  to  fill  out  the  lines  of  my  view  of  the  situation 
upon  matters  pertaining  thereto  which  are  in  doubt  and 
which  may  be  the  subject  of  litigation. 

The  tendency  of  financial  institutions — known  in  our 
State  as  ''moneyed  corporations" — is  to  affiliate  too  closely 
with  industrial  propositions,  the  ultimate  outcome  of  which 
cannot  be  adequately  determined  from  the  showings  made 
by  promoters  and  others  interested  in  their  flotation. 

There  is  a  side  of  the  picture  which  is  less  unpleasant 
than  the  side  which  I  have  turned  to  you.  It  is  that  the 
lesson  which  has  been  taught  by  the  organization  of  the 
Shipbuilding  Company  had  a  wholesome  effect  upon  Wall 
Street  and  other  financial  institutions.  It  is,  too,  because 
the  present  Superintendent  of  Banks  in  the  State  of  New 
York  ably  supervised  the  adjustment  of  the  intricate  de- 
tails, so  far  as  his  jurisdiction  was  concerned,  that  no  finan- 
cial panic  resulted  from  a  disclosure  of  the  condition  into 
which  the  Trust  Company  of  the  Republic  had  been  led  by 
its  president. 

I  have  no  time  to  draw  a  parallel,  but  I  think  that  those 
who  are  familiar  with  the  history  of  similar  undertakings 
in  England  and  Scotland  will  admit  that  they  show  a  more 
dangerous  affiliation  in  those  countries  between  financial 
institutions  and  industrial  promotions.  Across  the  water 
jnany  men  of  high  financial  position  acted  as  directors  of 


FINANCIAL  AND  INDUSTRIAL  TRUSTS      319 

flotations  wliicli  were  similar  to  this  ouc,  ])iit  which  had 
really  a  less  stahle  foundation.  Many  financial  institutions 
not  only  fathered  industrial  propositions  which  failed  to 
turn  out  as  expected,  but  they  endorsed  them.  The  result 
was  that  in  Eni^land,  after  a  collapse,  financial  institution 
after  financial  institution  closed  its  dooi's  and  a  panic 
resulted. 

From  the  standpoint  of  a  single  individual,  I  believe 
that  I  have  portrayed  to  you  the  final  example  of  an  under- 
taking of  the  kind  which  I  have  been  describing.  Today, 
as  a  consequence  of  the  lesson  which  has  been  learned 
through  the  false  establishment  of  the  United  States  Ship- 
building Company,  our  financial  leaders  and  our  financial 
institutions  arc  gradually  withdrawing  from  affiliations 
with  industrial  combinations,  and  each  one  is  assuming  its 
true  position. 

You  will  agree  w^th  me  that  the  institution  and  the 
industrial  combination  are  of  value,  each  in  its  place,  but  a 
close  partnership  between  the  two  is  dangerous,  inasmuch 
as  the  financial  institution  and  the  industrial  combination 
must  necessarily  stand  upon  a  different  footing  in  their 
relations  to  the  public.  The  salve  in  the  situation  is  that 
the  general  public  did  not  become  a  participator  in  the 
flotation  of  which  I  have  been  speaking,  and  did  not  invest 
largely  in  the  securities  of  the  Shipbuilding  Company. 

The  result  has  been  imfortunate  for  those  who  did 
become  investors,  but  the  heaviest  loss  fell  upon  those  who 
were  in  a  better  financial  position  to  stand  it,  namely,  the 
underwriters,  who  entered  for  profit  and  who  exj^ected 
large  returns  with  but  little  responsibility. 

Even  in  the  case  of  the  Trust  Company  of  the  Republic 
it  is  a  subject  for  congratulation  that  through  the  wiser 
subsequent  management  which  undertook  its  reorganiza- 
tion, its  integrity  has  been  maintained,  its  financial  credit 
has  been  sustained  and  as  a  consequence  of  the  assistance 
rendered  bv  the  men  who  foniied  what  is  known  as  the 


B20  L.  WALTER  SAMMIS 

Sheldon  Syndicate,  who  can  well  afford  the  loss,  it  is  in 
a  position  where  it  can  continue  business  and  place  itself 
before  both  the  public  and  the  financial  world  as  an  insti- 
tution of  probity  and  integrity. 

I  apprehend  that  you  would  like  to  hear  a  narration 
of  the  entanglements  of  Governor  Odell  of  the  State  of 
New  York,  Mr.  J.  Pierpont  Morgan  and  his  firm,  the  bank- 
ing house  of  Harris,  Gates  &  Co.,  and  many  others  who  be- 
came collaterally  interested;  but  it  is  impossible  for  me  to 
enter  upon  these  various  subjects. 

I  leave  therefore  this  matter  with  you,  having  attempted 
to  tell  you  briefly  and  succinctly  and  yet  as  correctly  as  I 
have  been  able  and  without  bias,  the  true  history  of  the 
organization  of  the  United  States  Shipbuilding  Company. 


SOME  ASPECTS  OF  NEW  JERSEY'S  CORPORATE 

POLICY. 

BY  HON.  JAMES  B.  DILL. 

[Of  the  Court  of  Errors  and  Appeals  of  New  Jersey.] 

INTRODUCTION. 

If  an  advocacy  without  criticism  of  New  Jersey's  cor- 
porate policy  is  anticipated,  such  expectation  will  meet 
with  disappointment. 

The  topic  leads  to  a  discussion  upon  a  higher  plane  than 
that  of  a  mere  history  or  definition  of  New  Jersey's  corpo- 
rate law,  or  an  inquiry  as  to  whether  the  state  has  made 
money  by  its  policy. 

It  suggests  a  consideration  of  the  resulting  and  far- 
reaching  effect  of  New  Jersey's  policy  as  found  in  the  trend 
of  the  corporation  laws  of  the  various  states,  and  the  effect, 
not  alone  upon  the  State  of  New  Jersey,  not  alone  upon 
other  states  who  have  been  and  are  adopting  New  Jersey's 
corporation  laws,  but  upon  the  country  at  large,  and,  finally, 
upon  the  general  industrial  situation. 

No  aspect  of  New  Jersey's  corporate  policy  would  be 
complete  without  at  least  the  side  lights  of  the  struggle 
between  New  York,  the  financial  Empire  State,  and  the 
adjoining  smaller  State  of  New  Jersey,  for  corporate 
supremacy. 

Hence  we  may  profitably  trace  the  course  of  corporate 
legislation  in  New  York  for  the  past  decade,  analyzing  the 
attempt  of  New  York  to  outlegislate  New  Jersey,  to  stop 
the  outflow  of  capital  to  New  Jersey  for  incorporation  and 
to  acquire  corporate  prestige  for  herself.  By  way  of  con- 
trast the  history  of  New  Jersey's  acts  for  a  like  period  is  of 
interest,  not  passing  those  enactments  in  which  the  legisla- 

321 

B— II— 21 


322  JAMES  B.  DILL 

ture  seemed  to  have  nodded  encouragement,  if  nothing 
more,  to  large  corporations. 

A  comparison  of  the  corporate  procedure  of  New  York 
with  that  of  New  Jersey  for  the  past  ten  years  indicates 
that  New  York  has  been  engaged  in  the  business  of  letting 
dowTi  the  bars,  while  New  Jersey  has  deemed  it  the  better 
policy  to  put  them  up,  at  least  in  certain  directions,  notably 
in  the  matter  of  required  publicity.  Both  states  appear 
to  have  been  working  along  different  lines  of  policy  to  at- 
tract corporations  and  New  Jersey  is  generally  thought  to 
have  been  the  more  successful. 

From  this  comparison  it  may  be  argued  that  success  in 
attracting  corporate  capital  does  not  always  lie  along  lines 
of  mere  liberality  or  laxity  of  statutory  enactments. 

The  secret  of  New  Jersey's  success,  so  far  as  it  be  suc- 
cess, to  attract  corporate  capital,  does  not  lie  in  the  so- 
called  liberality  of  her  laws,  or  in  laxity  of  procedure,  but 
in  other  elements  of  her  public  administration,  which  may 
properly  be  discussed  later. 

Only  the  width  of  the  North  River  separates  New 
Jersey  from  the  principal  city  of  New  York  State,  the 
financial  center  of  the  country.  In  that  city  corporations 
of  prominence  throughout  the  United  States  have  offices, 
and  from  there  the  executive  officers  of  most  of  the  great 
industrial  corporations  organized  during  the  last  few  years 
direct  the  operations  and  manage  the  finances  of  their  sev- 
eral companies.  The  great  majority  of  these  companies 
thus  operated  in  New  York  State  are  corporations  having, 
not  New  York  charters,  but  New  Jersey  charters. 

I.    NEW  YORK  LEGISLATION. 

In  1892  in  the  State  of  New  York,  with  a  New  Jersey 
charter,  with  New  Jersey  powers  and  more  than  New  Jer- 
sey's freedom  from  state  supervision  and  publicity,  and  at 
a  reduced  incorporation  tax,  there  was  incorporated  by 
special  act  of  the  New  York  Legislature  one  of  the  larger 


NEW  JERSEY'S  CORPORATE  POLICY        323 

business  corporations  existing  under  New  York  laws — the 
General  Electric  Company. 

Governor  Flower  in  approving  the  bill  said  in  substance : 

"The  measure  is  approved  because  its  objects  cannot  be  secured  under  the 
general  law.  and  because  its  approval  will  keep  within  the  state  a  corporation 
ready  to  invest  a  large  amount  of  capital,  and  which,  without  the  concessions 
allowed  by  its  proposed  charter,  would  be  incorporated  under  the  laws  of  New 
Jersey.  •   .    , 

"The  reduction  of  the  tax  for  incorporation  from  one-eighth  of  one  per 
cent  upon  the  capital  stock  is  to  make  the  tax  uniform  with  that  required  by 
the  laws  of  New  Jersey  so  far  as  this  corporation  is  affected." 

One  of  the  conservative  New  York  City  dailies  in  1892 
said: 

"New  York  has  for  years  been  driving  its  corporations  and  its  corporate 
capital  and  taxable  property  out  of  the  state  into  New  Jersey  and  other  states 
where  enterprise  is  welcomed  instead  of  persecuted." 

The  Chamber  of  Commerce  of  New  York  City  sought 
to  procure 

"A  change  in  the  corporation  laws  which  drive  so  many  industrial  enter- 
prises to  other  states  for  organization," 

but  without  result. 

The  situation  was  officially  summed  up  in  the  report 
of  the  comptroller  of  the  State  of  New  York: 

"It  is  time  that  great  corporations  having  their  actual  headquarters  in 
this  state  and  a  nominal  office  elsewhere,  doing  nearly  all  of  their  business 
within  our  borders,  should  be  brought  within  the  jurisdiction  of  this  state, 
not  only  as  to  matters  of  taxation,  but  in  respect  to  other  and  equally  impor- 
tant affairs. 

"This  can  be  accomplished  by  the  adoption  of^  corporation  laws  worthy 
of  the  greatest  commercial  state  in  the  Union. 

"It  is  a  sad  commentary  upon  our  system  that  our  tax  list  reflects  little 
of  the  great  wave  of  organization  that  has  swept  over  the  country  during  the 
past  year,  and  to  which  this  state  contributed  more  capital  than  any  other 
state  in  the  Union." 

New  Jersey  appeared  to  be  attracting  coii:)orations 
away  from  New  York  and  legislative  effort  was  made  to 
induce  capital  to  return  to  the  state. 

One  effort  was  in  the  direction  of  a  lessening  of  the 
degree  of  corjoorate  publicity. 

From  1848  to  1890  practical  publicity  had  been  required 
as  to  capital,  debts,  liability  and  stockholders,  annual  re- 
ports containing  such  data  being  required  to  be  verified,  filed 


324  JAMES  B.  DILL 

and  published.    This  degree  of  publicity  was  lessened  some- 
Avhat  by  the  provisions  of  the  ''Stock  Corporation  Law." 

In  1890  the  "Stock  Corporation  Law"  required  business 
corporations  to  file  annually  a  report  stating  the  amount 
of  capital  stock  and  the  proportion  actually  paid  in;  the 
amount  and  nature  of  its  existing  assets  and  debts  and  all 
its  receipts  and  expenditures  during  the  year;  the  names 
of  stockholders;  and  the  dividends,  if  any,  declared— in 
substance,  a  re-enactment  of  the  Act  of  1875,  but  omitting 
the  requirement  that  the  report  be  published. 

Li  1892  the  law  was  amended,  eliminating  publicity 
except  the  amount  of  capital  stock  and  the  proportion 
actually  issued;  the  amount  which  the  debts  at  the  date  of 
the  signing  of  the  report  do  not  exceed;  and  the  amount 
which  its  assets  at  least  equal. 

These  were  requirements  amounting  to  nothing;  a 
statement  "that  the  debts  do  not  exceed  one  million  dol- 
lars" and  "assets  at  least  equal  one  dollar"  complied  with 
the  statute  and  gave  no  infomiation  to  the  public,  and  re- 
ports in  substantially  this  form  were  actually  filed  by  im- 
portant corporations  and  accepted  as  a  compliance  with 
the  statute. 

Later  a  new  section  was  added  to  the  act,  under  which 
any  corporation  could  avoid  publicity  by  adding  to  its  eon- 
tracts  specific  words  of  waiver  of  the  individual  statutory 
liability  of  the  stockholder  and  director. 

TVhen  Theodore  Roosevelt  was  elected  Governor  of  the 
State  of  New  York  he  appointed  a  commission  to  draft  a 
code  of  corporation  laws.  The  result  of  the  work  of  this 
commission  was  the  Roosevelt  Corporation  Act,  which 
failed  to  pass  the  legislature. 

The  reason  for  the  defeat  of  that  act  seems  to  have 
been  a  failure  on  the  part  of  the  dominant  powers  in  New 
York  State  to  grasp  the  true  situation.  The  opposition 
to  it  was  grounded  in  the  belief  of  the  dominant  political 
powers  that  corporate  capital  would  be  attracted  by  liber- 


NEW  JERSEY'S  CORPORATE  POLICY       325 

alit.y — so-rallod — of  rorporato  onaetmmts  and  l)y  the  orca- 
tion  of  so-called  attractive  features. 
The  principal  changes  have  heen: 

1.  The  reduction  of  the  incorporation  tax  from  one- 
eighth  to  one-twentieth  of  one  per  cent  on  the  authorized 
capital. 

2.  The  doing  away  with  the  necessity  of  filing  an  an- 
nual report  or  statement,  unless  and  only  after  demand  by 
a  creditor  or  stockholder. 

3.  Enlarged  powers  for  borrowing  money. 

4.  Removal  of  any  restriction  upon  the  power  to  con- 
tract indebtedness. 

5.  Power  imaccompanied  by  responsibility,  in  the  issue 
of  stock,  it  being  issuable  for  property,  or  for  that  great 
medium  of  ''water,"  sendees,  as  well  as  for  other  consider- 
ations. 

6.  Creation  of  preferred  stock  hy  the  vote  of  two- 
thirds,  with  little  power  in  the  remaining  one-third  to 
effectually  object. 

7.  The  issue  of  partially  paid  stock. 

8.  Limiting  stockholders'  access  to  the  stock  books  to 
three  hours  of  the  business  day. 

9.  Permitting  the  pooling  of  stocks  and  the  issue  of 
charters  with  broad  and  heterogeneous  powers. 

10.  Authorizing  the  election  as  directors  of  persons 
who  are  not  stockholders. 

Result. 

These  so-called  attractive  features  did  not  seem  to  linng 
great  corporations  into  the  8tate  of  New  York. 

The  great  cor]:)orations,  financed  by  New  York  men, 
with  New  York  capital,  continued  to  go  into  the  State  of 
New  Jersey  for  incorporation,  returning  to  the  State  of 
New  York  to  be  treated  as  foreign  corporations,  although 
it  is  within  the  latter  state  that  they  transact  their  princi- 
pal financial  business  and  maintain  their  great  financial 


326  JAMES  B.  DILL 

headquarters.    Had  the  Roosevelt  Corporation  Act  been 
passed,  it  is  likely  that  results  would  have  been  different. 

n.    NEW  JERSEY  LEGISLATION. 

An  examination  of  the  history  of  New  Jersey's  corpo- 
rate policy  for  the  same  period  may  lead  to  the  conclusion 
that  New  Jersey  more  truly  grasped  the  situation  and 
adopted  the  theory  that  by  raising  rather  than  lowering 
the  standard  of  corporate  legislation  corporate  capital 
would  be  attracted. 

In  1895  the  Legislature  of  New  Jersey  appointed  a  com- 
mission to  revise  and  codify  the  Act  Concerning  Corpora- 
tions and  ^*to  incorporate  such  amendments  as  they  might 
deem  mse  and  necessary  to  perfect  the  system  of  general 
corporation  laws  of  the  state." 

Revision  of  1896. 

The  revision  of  1896  was  intended  to  meet  the  modem 
tendency  of  business  concerns  to  incorporate.  It  recog- 
nized the  commercial  need  for  a  scheme  of  organization 
for  private  companies  as  distinguished  from  public  corpo- 
rations, the  salient  features  of  which  scheme  were  sim- 
plicity of  organization  and  freedom  of  internal  manage- 
ment, including  dissolution,  without  recourse  to  judicial 
proceedings. 

New  Jersey  in  this  revision  also  recognized  the  demand 
of  the  times  for  extra-territorial  corporations — corpora- 
tions which  should  clearly  have  the  power,  so  far  as  the 
state  of  their  creation  could  confer  it,  to  go  forth  and  en- 
gage in  business  in  other  states. 

This  revision  made  possible  the  formation  of  the  great 
corporations  of  today,  whose  business  is  as  far-reaching  as 
civilization  itself,  not  mere  paper  organizations,  but  such 
institutions  as  the  United  States  Steel  Corporation  and 
others  of  the  same  caliber. 

It  went  back  for  some  of  its  principles  to  that  grea^ 


NEW  JERSEY'S  CORPORATE  POLICY        327 

organization  in  1791  which  was  framed  by  Alexander  Ham- 
ilton. 

It  did  no  violence  to  the  salient  features  of  the  revision 
of  184G;  it  eliminated  certain  crude  features  of  the  laws  of 
1875,  broadened  powers,  removed  useless  restrictions  and 
laid  in  1896  the  foundation  for  the  laws  which  in  1903  were 
to  prove  so  serious  a  barrier  to  the  realization  of  New 
York's  hope  of  financial  returns  by  way  of  corporation 
taxes. 

New  Jersey  answ^ered  questions  as  to  the  line  of  demar- 
cation between  the  tramp  company  and  the  legitimate  cor- 
poration with  extra-territorial  powers. 

She  insisted  upon  the  rule  of  publicity,  of  location,  of 
registration  for  her  corporations,  and  under  that  law^  the 
principal  office  became  the  registered  office,  and  by  statu- 
tory enactment  the  two  terms  became  synonymous. 

In  1898  there  was  created  a  commission  to  revise  the 
financial  laws  of  the  State  of  New^  Jersey.  At  or  about  this 
time  New^  York  especially,  and  New  Jersey  to  a  lesser  de- 
gree, were  infested  by  corporations  organized  under  the 
laws  of  other  states  using  a  banking  or  trust  company 
name  without  any  of  the  safeguarding  provisions  of  finan- 
cial institutions.  In  other  words,  such  companies  were 
bogus  banks,  bogus  trust  companies  and  frauds  upon  the 
public  because  they  styled  themselves  banks  and  trust  com- 
panies, assuming  that  the  public  would  believe,  from  their 
name,  that  they  were  institutions  safeguarded  by  financial 
provisions,  whereas,  as  a  matter  of  fact  they  might  be  the 
merest  shells  organized  under  the  laws  of  some  state  which 
did  not  clearly  prohibit  the  use  of  a  banking  name  to  a 
non-banking  company. 

In  the  State  of  New  York  there  was  introduced  the 
Slater  Bill,  which  prohibited  either  a  foreign  or  domestic 
corporation  from  the  use  of  a  fictitious  banking  name,  that 
is  to  say,  it  forbade  the  name  of  a  trust  company  or  bank 
to  be  used  by  a  coi^poration,  foreign  or  domestic,  unless  it 


328  JAMES  B.  DILL 

was  actually  a  financial  institution  subject  to  the  bank- 
ing department  of  the  State  of  Ncav  York. 

Strange  to  say  this  bill  Avas  defeated  in  the  New  York 
Legislature,  being  considered  a  departure  from  the  policy 
of  the  State  of  New  York  to  create  attractive  features 
for  corporations. 

New  Jersey's  action  in  this  respect  is  worthy  of  mention 
by  way  of  contrast.  While  the  banking  laws  of  the  State  of 
New  Jersey  were  put  upon  a  safe  and  sound  foundation  by 
the  commission,  nevertheless  that  commission  jout  in  force 
restricted  and  sweeping  prohibitions  against  the  use  of 
financial  names  by  any  company,  foreign  or  domestic,  ex- 
cepting an  actual  financial  institution  organized  and  doing 
a  banking  business,  subject  to  the  banking  laws  of  the 
state. 

Moreover,  the  State  of  New  Jersey  drew  a  sharp  line 
of  distinction  between  financial  and  non-financial  corpora- 
tions, prohibiting  not  only  the  use  of  a  financial  name  to 
a  non-financial  corporation,  but  first  giving  all  of  the  ordi- 
nary financial  powers  to  trust  companies  and  banks,  and 
then  on  the  other  side  as  strongly  prohibiting  not  only 
their  use  to  other  corporations,  but  prohibiting  any  at- 
tempt to  recite  such  powers  in  the  certificate  of  organiza- 
tion of  a  business  company. 

No  attempt  at  this  juncture  will  be  made  to  describe 
the  banking  revision  of  the  State  of  New  Jersey,  although 
is  has  played  its  part  in  the  history  of  that  state,  more 
than  to  say  it  was  along  the  same  lines  of  carefully  con- 
sidered policy  as  the  General  Corporation  Act,  and  that 
it  was  intended  to  facilitate  the  organization  of  banks  and 
trust  companies  under  the  state  law  and  to  draw  financial 
capital  from  New  York  to  New  Jersey.  It  Avas  intended 
to  do  just  what  it  has  accomjolished,  and  Exchange  Place 
and  other  streets  in  Jersey  City  running  to  the  ferry  now 
constitute  a  financial  district  familiarly  known  as  West 
Wall  Street. 


NEW  JERSEY'S  CORPORATE  POLICY        329 

AVliilo  New  York  was  removin^^  every  vestige  of  re- 
quired publicity  on  tlie  part  oflier  corporations,  New  Jersey 
looked  at  the  matter  from  a  different  point  of  view.  She 
decided  that  New  York  was  making  a  mistake  and  that 
she  would  not  only  maintain  the  de^a-ee  of  publicity  there- 
tofore required,  but  would  go  one  step  further. 

Chapter  124  of  the  Laws  of  1900  was  a  provision  which 
not  only  was  intended  to  enforce,  but  as  a  matter  of  actual 
result  has  enforced  the  theory  of  private  publicity  in  the 
State  of  New  Jersey. 

Corporations  are  required  to  file  an  annual  report, 
signed  by  two  directors,  or  by  the  president  and  another 
officer,  which  report  must  give  the  name  of  the  corpora- 
tion, the  location  of  its  registered  office  in  New  Jersey  and 
the  name  of  the  agent  in  charge  of  such  office,  who  must 
be  either  a  resident  of  New  Jersey  of  full  age,  or  a  coi-po- 
ration  under  the  Banking  Act. 

The  report  is  also  required  to  state  the  character  of 
the  business  actually  carried  on,  the  amount  of  authorized 
capital,  the  amount  actually  issued  and  outstanding,  and 
by  another  existing  statute  coi-porations  are  required  to 
state  separately  the  amount  paid  in  money  and  the  amount 
of  stock  issued  for  property.  The  names  and  addresses 
of  the  directors  and  officei-s  of  the  company  and  when 
the  term  of  each  expires  are  required.  The  date  of  the 
next  annual  meeting  must  be  given  and,  what  is  most 
important,  the  officers  are  required  in  the  report  to  certify 
whether  or  not  the  name  of  the  company  has  been  dis- 
played at  its  registered  office,  whether  or  not  the  corpora- 
tion has  maintained  a  registered  office  and  has  kept  a 
stock  transfer  book  and  a  stock  book,  and  whether  or  not 
these  books  have  been  at  all  times  during  business  hours 
open  to  the  inspection  of  stockholders. 

A  false  statement  in  a  corporation's  report  will  render 
persons  signing  the  report  liable  for  the  debts  of  the  com- 
pany, and  is  equivalent  to  perjury. 


330  JAMES  B.  DILL 

New  Jersey  adopted  a  penalty  for  failure  to  file  that 
report  which  has  not  been,  for  effectiveness,  excelled  by 
the  provisions  of  many  other  states.  It  provided  that,  if 
the  report  should  not  be  filed  and  the  officers  should  refuse 
to  sign  it,  officers  and  directors  should  thereupon  go  out 
of  office  and  be  ineligible  for  the  space  of  a  year. 

Thus  while  New  York  was  receding  from  the  doctrine 
of  publicity,  New  Jersey  was  fastening  her  policy  of  private 
publicity  upon  corporations  in  such  a  way  that  it  could 
neither  be  avoided  nor  evaded. 

The  legislature  carried  this  theory  of  publicity  a  step 
further.  It  took  aw^ay  from  corporations  the  power  to 
create  preferences  and  distinctions  in  stocks  by  mere  reso- 
lution of  the  board,  or  by  mere  provision  of  the  by-laws 
which  might  or  might  not  be  public  property,  by  providing 
that  all  such  restrictions,  limitations  and  differentiations 
in  stocks  must  be  stated  in  the  certificate  of  incorporation 
and  filed  in  the  office  of  the  secretary  of  state. 

As  to  companies  previously  existent,  it  provided  that 
such  alterations  might  and  should  be  embodied  in  amend- 
ments to  the  existing  certificates  of  incorporation.  In  a 
word,  it  required  a  public  record  to  be  officially  made  of 
limitations  upon  and  differentiations  between  the  rights  of 
stockholders  as  contained  in  so-called  preference  shares. 

III.    SOME  POINTS  OF  CONTRAST  BETWEEN  NEW 
YORK  AND  NEW  JERSEY  LAWS. 

The  contrast  between  the  corporate  policy  of  New  York 
and  New  Jersey  suggests  the  reason,  and  perhaps  the  re- 
spects in  which  New  Jersey  has  been  successful  in  the 
effort  to  attract  corporate  capital. 

The  Business  Corporation  Statutes. 

The  laws  of  the  State  of  New  York  applicable  solely  to 
business  corporations  do  not  by  themselves  constitute  a 
complete  code. 


NEW  JERSEY'S  CORPORATE  POLICY        331 

One  must  apply  to  tlio  statutes  of  New  York  a  process 
of  elimination  to  determine  what  laws  are  applicable  to 
business  corporations.  This  arises  from  the  fact  that  in 
many  instances  statutes  are  enacted  relative  to  corpora- 
tions other  than  business  corporations,  and  such  statutes, 
or  portions  thereof,  are  made  applicable  to  and  binding 
upon  business  corporations. 

Specific  sections  of  various  acts  are  made  applicable  to 
business  corporations,  with  the  result  that  it  is  well-nii^h 
impracticable  to  gather  together  the  laws  which  apply  ex- 
clusively to  business  corporations,  and  to  make  of  them  a 
distinct  compilation. 

On  the  other  hand,  the  laws  of  New  Jersey  relating  to 
l)usiness  corporations  are  embraced  in  a  single  codification 
known  as  the  "Act  Concerning  Corporations"  (Revision  of 
1896),  and  this  revision  as  published  by  the  secretary  of 
state,  exclusive  of  annotation,  decisions  and  forms,  covers 
about  foi*ty-five  pages. 

Special  Charters. 

Under  the  laws  of  New  Jersey  special  charters  cannot 
be  granted,  but  all  must  come  under  the  appropriate  gen- 
eral acts,  with  the  result  that  no  organization  can  by  spe- 
cial favor  of  the  legislature  obtain  an  advantage  over 
another  of  the  same  class.  In  New  York  special  charters 
are  obtainable. 

The  Certificate  of  Incorporation. 

A  certificate  of  incorporation  of  New  York  carries  less 
weight  than  one  issued  under  the  laws  of  New  Jersey. 

Under  the  laws  of  New  York  the  recitation  of  powers 
and  rights  contained  in  the  certificate  of  incorporation  arc 
by  no  means  conclusive  evidence,  and  a  charter  under  the 
general  laws  does  not  rank  with  a  special  charter  granted 
by  act  of  the  legislature.  Hence  special  charters  are 
sought  and  not  infrequently  obtained. 


332  JAMES  B.  DILL 

The  courts  of  New  Jersey,  however,  have  decided  that 
a  certificate  of  incorporation  is  equivalent  to  a  special  act 
of  the  legislature  and  that  it  cannot  be  attacked  collater- 
ally, that  it  is  evidence  of  the  rights  and  powers  therein 
set  forth,  and  that  it  can  be  attacked  only  by  an  action 
l^rought  by  the  Attorney-General  for  that  purpose.  Thus, 
the  importance  of  a  certificate  of  incorporation  in  New 
Jersey  is  readily  seen. 

The  same  constitution  which  is  the  foundation  for  this 
principle  forbids  special  favors  from  the  legislature  in  the 
forai  of  special  charters. 

Extra-Territorial  Powers. 

The  laws  of  the  State  of  New  York,  unlike  those  of  New 
Jersey,  contain  no  specific  provisions  for  extra-territorial 
powers  for  its  corporations. 

New  Jersey,  however,  limiting  the  powers  of  the  cor- 
poration to  transact  business  within  or  without  the  state  to 
lawful  business,  and  thus  making  the  company  subject  to 
local  laws  of  the  state  into  which  it  goes,  expressly  au- 
thorizes by  statute  its  corporations  to  do  business  outside 
of  New  Jersey. 

New  Jersey  says  to  its  corporations — provided  you  limit 
your  transactions  to  business  which  is  lawful  at  home  and 
when  transacted  abroad  also  lawful  by  laws  local  to  the 
transaction,  then  you  may  do  business  abroad. 

As  indirectl}^  connected  with  this  attitude  of  New 
Jersey  towards  other  states,  she  does  not  attempt  to  tax 
the  property,  tangible  or  intangible,  of  her  corporations 
where  situated  without  the  state,  but  relegates  her  corpo- 
rations in  that  respect  to  the  tax  authorities  of  the  states 
in  which  tlie  property  is  located. 

The  contrary,  however,  is  New  York's  position. 

People   ex   rel.   United  Verde   Copper   Co.   vs. 
Feitner,  54  Appellate  Div.  Rep.  (N.  Y.),  217. 


NEW  JERSEY'S  CORPORATE  POLICY        333 

Taxation. 

Tlie  tax  systems  of  Now  York  and  New  Jersey  present 
a  marked  difference. 

In  determininf::  the  taxes  in  the  State  of  New  York,  the 
clement  of  discretion  on  tlic  part  of  the  taxing  l)oard  or 
taxing  officials,  which  often  means  the  individual  taxing 
officer,  or  the  employe  upon  whom  he  relies  to  do  the  work, 
plays  an  important,  sometimes  a  controlling,  part. 

This  discretion  fixes  the  amount  of  the  tax. 

Discretion,  by  the  words  of  the  statute  limited  to  official 
discretion,  is  one  of  the  corner  stones  of  the  New  York  tax 
system.  In  New  York  the  tax  question  is  not  merely  a 
mathematical  proposition  worked  upon  the  jiublic  black- 
board. 

In  New  Jersey,  however,  the  tax  question  is  one  into 
which  discretion  cannot  enter.  The  one-tenth  of  one  per 
cent  upon  the  capital  issued  and  paid  up  is  the  basis  for 
the  fraction  which  must  be  worked  out  on  the  public  black- 
board in  plain  view  of  all  parties.  No  influence,  political 
or  otherwise,  can  change  the  amount  of  the  tax.  One-tenth 
of  one  per  cent  of  the  capital  issued  and  outstanding 
fixes  both  the  numerator  and  the  denominator  of  the  frac- 
tion. 

We  have  seen  parallel  columns  of  tabulated  figures 
showing  the  difference  between  the  taxes  in  New  York  and 
New  Jersey,  and  showing  how  much  cheaper  it  is  to  organ- 
ize in  the  State  of  New  York,  ])ut  we  have  not  seen  included 
in  these  compilations  one  feature  of  New  York's  taxation — 
the  local  tax. 

In  the  State  of  New  York,  the  corporation  pays  a  fran- 
chise tax,  the  annual  comptroller's  tax,  and  also  the  local 
tax.  This  local  tax  in  New  York  City  is  about  two  per  cent 
on  the  corporation's  capital  employed  in  the  state. 

New  York  holds  that  a  corporation  organized  under  its 
laws  although  engaged  in  business  outside  of  that  state,  is 


334  JAMES  B.  DILL 

taxable  in  New  York  upon  bank  deposits  outside  of  New 
York,  and  on  bills  and  accounts  receivable  for  goods  sold 
outside  of  the  state  to  persons  outside. 

It  is  also  taxable  on  debts  due  to  the  New  York  com- 
pany for  business  wholly  carried  on  out  of  the  state. 

It  is  taxable  on  intangible  assets. 

The  Court  of  Appeals  in  affirming  the  decision  of  the 
Supreme  Court  (People  ex  rel.  United  Verde  Copper  Co.  vs. 
Feitner,  54  App.  Div.,  217)  confirmed  the  doctrine  that  a 
New  York  corporation  is  locally  taxable  on  its  intangible 
assets,  although  situated  without  the  State  of  New  York — 
that  bank  balances,  bonds  and  stocks  of  other  companies, 
accounts  payable  to  the  New  York  company,  were  taxable 
in  New  York  and,  in  the  case  in  question,  taxable  in  the 
City  of  New  York. 

This  decision,  it  is  said,  drove  the  United  Verde  Copper 
Company,  a  New  York  corporation  (Senator  Clark's  great 
mining  company),  to  go  out  of  New  York  as  a  domestic 
corporation  and  to  come  back  under  a  charter  obtained  from 
another  state  authorizing  it  to  do  the  same  business  in  New 
York  that  it  had  done  before,  but  leaving  New  York  with- 
out the  power  to  tax  the  United  Verde  Copper  Company, 
as  a  foreign  corporation,  upon  scarcely  more  than  a  tithe 
of  its  personal  property  upon  which  it  had  been  taxed  as  a 
New  York  corporation. 

In  the  year  in  which  the  United  Verde  Copper  Company 
was  a  New  York  corporation,  it  paid  to  New  York  City 
alone  taxes  to  the  amount  of  about  $34,000  on  an  assessed 
valuation  of  $1,443,920,  and  the  court  said  that  $1,000,000 
might  properly  have  been  added  to  that  assessed  valuation. 

In  the  next  year  the  same  company,  as  a  foreign  cor- 
poration, is  said  to  have  paid  to  New  York  City  taxes  of 
only  $235  upon  an  assessed  valuation  of  $10,000. 

The  capitalization,  location  and  quantity  of  assets,  and 
the  business  of  the  corporation  were  said  to  be  practically 
the  same  in  both  years. 


NEW  JERSEY'S  CORPORATE  POLICY        335 

The  difference  in  annual  eliarges  between  ^34,000  and 
$235  is  asserted  to  have  been  the  net  disadvantage  of  being 
a  New  York  corporation,  from  the  tax  standpoint. 

New  Jersey,  however,  does  not  tax  property  situated 
without  the  state,  or  debts  due  the  company  which  are  the 
result  of  transactions  without  the  state.  In  practice  it 
accepts  the  one-tenth  of  one  per  cent,  the  annual  assess- 
ment, as  in  lieu  of  all  other  taxes,  excepting  those  upon 
real  estate  or  plants  actually  within  the  state. 

From  New  York  City's  local  taxes  to  the  township  of 
Esopus  is  not  so  violent  a  transition  in  the  subject  as  would 
seem. 

From  the  records  of  the  office  of  the  secretary  of  state 
at  Albany  one  might  be  justified  in  assuming  that  Esopus 
was  a  large  and  flourishing  cit}-.  It  is  on  paper  the  prin- 
cipal office  of  many  large  and  well-known  corporations, 
both  manufacturing  and  otherwise.  More  than  one  New 
York  City  business  enterprise,  having  a  rated  capital  in 
the  millions,  has  its  principal  office  on  paper  at  Esopus. 

Esopus,  however,  instead  of  being  a  large  and  flourish- 
ing city,  is  a  channing  country  village  on  the  Hudson  River. 

No  inconsiderable  part  of  the  taxes  of  the  township  of 
Esopus  are  paid  hy  the  corporations  which  have  no  further 
acquaintance  with  Esopus  than  that  descri])ed  by  Judge 
Finch  in  the  Buffalo  Steamboat  case.  On  every  day  except- 
ing the  day  of  the  annual  meeting  of  these  corporations  the 
interests  are  represented  and  guarded  by  the  solitary  sign 
Ijearing  their  name. 

Esopus  owes  its  fame  as  a  city  of  refuge  for  corpora- 
tions to  the  tax  doctrine  established  by  the  Court  of  Ap- 
peals in  the  Buffalo  Steamboat  case,  specifically  the  Union 
Steamboat  Co.,  Respondent,  vs.  The  City  of  Buffalo,  Appel- 
lant (82  N.  Y.,  351),  in  which  case  the  Court  of  Appeals 
held  that  for  the  purpose  of  taxation,  the  designation  of 
the  place  in  which  the  principal  office  is  to  be  located,  in 
the  certificate  of  incorporation  of  a  company,  is  conclusive; 


336  JAMES  B.  DILL 

and  in  the  county  thus  designated  alone  can  the  personal 
property  of  the  corporation  be  lawfully  taxed. 
Finch,  J.,  said: 

"It  is  urged  also  that  the  purpose  for  which  the  principal  office  of  the 
plaintiff  was  located,  in  the  county  of  Rockland,  was  to  avoid  taxation.  That 
may  be  *  *  *.  We  have  nothing  to  do  with  the  motive.  We  can  deal  only 
with  the  fact.  If  such  an  evil  exists,  another  authority  than  ours  must  provide 
for  its  correction."     (P.  356.) 

Hence  the  tax  system  of  New  York  presents  further 
inequalities,  inasmuch  as  a  corporation  with  a  million  dol- 
lars of  taxable  personal  assets  in  New  York  or  any  other 
city  in  the  state  may  by  a  paper  location  in  Esopus,  N.  Y., 
wholly  escape  New  York  City's  personal  taxes,  while  its 
next-door  neighbor,  if  not  posted  as  to  the  advantages  of 
Esopus-on-the-Hudson,  annually  pays  a  tax  of  some  thou- 
sands of  dollars. 

New  York's  system  of  taxation  is  in  vital  particulars 
diametrically  opposed  to  the  New  Jersey  system  of  a  uni- 
form rate  upon  a  publicly  specified  amount. 

The  doctrine  of  avoidance  is  often,  if  not  generally, 
sought  to  be  applied  to  New  York's  system  of  taxation. 

Corporations  and  business  houses  generally,  especially 
in  New  York  City,  are  annually  the  recipients  of  communi- 
cations from  gentlemen  claiming  to  be  members  of  the  bar, 
from  members  of  the  bar  doing  business  under  or  in  con- 
nection with  corporations  organized  for  that  purpose,  from 
persons  claiming  to  be  ex-tax  department  employes — 
claiming  both  special  and  specific  ability  to  reduce  current 
taxes. 

Each  claims  to  be  possessed  of  special  advantages  along 
the  line  of  discretionary  influence  or  Esopian  tax  exemp- 
tion locations 

Quite  recently  it  became  apparent  that  some  one  or 
more  of  the  New  York  tax-dodging  agencies  each  year  ob- 
tained in  advance  a  list  of  persons  and  corporations  per- 
sonally taxed  and  the  amount  of  these  taxes  and  used  this 
list  and  the  information  therein  contained  as  a  basis  for 


NEW  JERSEY'S  CORPORATE  POLICY        337 

their  advcrtisiiicf.  ^lore  than  this,  ])()liti('al  and  even  de- 
pa  rtnuMital  inthience  was  so  Ixddly  and  so  ])lainly  claimed 
that  the  tax  department  felt  it  inciiinhcnt  njjon  it  in  an 
(if'fieial  capacit}^  to  deny  these  claims  of  inlhiencc. 

There  is  no  history  of  a  New  Jersey  eirenlarization  of 
New  Jersey  comi)anies  offering  to  procnre  a  rednction  of 
New  Jersey  taxes  on  New  Jersey  corporations. 

The  one-tenth  of  one  per  cent  on  the  puhlished  capital 
issned  and  ontstandin^-  offers  no  field  for  Esopian  geninses 
or  for  sjjecial  advantages,  mathematical,  political  or  other- 
wise. 

The  Courts. 

Under  the  New  York  law  it  is  necessary  in  making  cer- 
tain corporate  alterations,  snch  as  change  of  name,  to  apply 
to  the  conrt  for  permission.  Snch  an  application  generally 
results  in  a  reference  and  a  hearing,  referee's  fees,  public 
advertisements  and  other  disbnrsements,  a  report  to  the 
court,  and  a  decision  of  the  court,  the  whole  involving  an 
expenditure  of  time  and  money. 

In  New  Jersey,  such  matters  are  within  the  powers  of 
the  stockholders  to  transact  without  going  to  the  courts, 
and  without  the  intervention  of  referees  and  the  pa^nent 
of  their  fees. 

In  New  York  a  receiver  may  be  appointed  by  any  Su- 
preme Court  Judge  sitting  in  any  part  of  the  state,  and  the 
l)roceeding  may  be  ex  parte. 

In  New  Jersey  there  is  only  one  official  who  can  ap])oint 
a  receiver  for  the  corporation,  and  that  is  the  chancellor. 

Registration  System. 

One  must  not  pass  by  the  advantage  which  has  come  to 
the  State  of  New  Jersey  in  the  requirement  that  all  corj^ora- 
tions  must  be  registered.  This  registration  is  with  a  citizen 
of  the  state  or  a  trust  or  other  company  authorized  by  law 
to  act  as  registered  agent  of  other  corporations. 

B— II— 22 


338  JAMES  B.  DILL 

Today  this  authorization  is  concentrated  in  trust  com- 
panies. 

The  system  has  resulted  in  the  creation  of  the  business 
of  registering  and  caring  for  corporations,  or,  as  it  is  com- 
monly put,  of  providing  and  maintaining  a  registered  office. 

These  registration  companies  have  played  an  important 
part  in  bringing  corporations  to  New  Jersey. 

Their  business  depends  upon  the  number  of  companies 
which  they  register  imder  the  New  Jersey  laws,  and  they 
have  become  canvassers,  although  unofficially,  for  the  State 
of  New  Jersey,  to  secure  business  for  that  state. 

It  is  due  not  only  to  the  laws  of  New  Jersey  that  she  has 
obtained  great  financial  success,  but  also  in  part  to  the  fact 
that  her  laws  are  so  widely  known  that  her  advantages  have 
been  so  thoroughly  advertised.  New  Jersey  has  had  a  keen 
eye  to  the  business  end  of  her  corporation  policy. 

IV.    RESULTS. 
The  Results  to  the  State  of  New  Jersey. 

From  a  financial  standpoint  there  can  be  no  question 
that  New  Jersey's  corporate  policy  has  been  pre-eminently 
successful. 

A  few  years  ago  the  state  showed  a  deficiency  in  various 
departments.  There  was  a  state  tax  and  a  state  debt.  The 
railroads  were  compelled  to  bear  a  heavy  burden  of  taxation 
and  New  Jersey  was  then  doing  precisely  what  New  York  is 
now  doing,  making  those  corporations  which  could  not  get 
away  pay  the  expenses  of  running  the  state. 

The  corporate  policy  of  New  Jersey,  as  shaped  by 
Henry  C.  Kelsey,  for  twenty-seven  years  Secretary  of  State, 
has  changed  the  situation  and  brought  sufficient  funds  to 
wipe  out  the  state  debt,  to  pay  all  of  the  current  state 
expenditures  and  to  enable  the  state  to  make  liberal  appro- 
priations each  year  for  public  improvements. 


NEW  JERSEY'S  CORPORATE  POLICY        339 

For  years  there  lias  been  no  state  tax,  and  the  impor- 
tance of  the  tax  on  personal  property  in  New  Jersey  has 
practically  disappeared. 

With  a  marked  increase  of  state  expenditures,  with  a 
large  appropriation  for  good  roads,  for  schools,  public  insti- 
tutions, annories,  etc.,  nevertheless  the  report  of  the  comp- 
troller of  the  state  in  1903  showed  a  surplus  of  some 
$3,000,000. 

The  state  receives  from  the  annual  franchise  tax  on 
corporations  maintaining  a  registered  office  within  its  bor- 
ders somewhat  more  than  $3,000,000  each  year. 

Banks. 

The  revision  of  the  l)anking  laws,  as  I  have  already  said, 
was  eminently  successful  in  drawing  banking  capital  from 
New  York  to  Xew  Jersey. 

New  Jersey  has  abandoned  all  attempts  to  tax  bank 
balances,  holding  to  the  theory  that  the  presence  of  money 
is  worth  to  the  state  more  than  the  tax  which  would  drive 
it  away. 

Industries. 

Tlie  corporate  policy  of  New  Jersey  has  had  a  marked 
effect  upon  her  industrial  growth. 

Many  large  organizations  fomied  first  in  New  Jersey 
with  the  intent  only  of  maintaining  a  registered  existence 
there,  after  becoming  acquainted  with  the  administration 
of  her  laws,  and  her  system  of  taxati(jn,  have  been  induced 
by  these  and  other  considerations  to  locate  plants  within 
the  state,  instead  of  the  one  formerly  chosen  for  location. 

Taxation  in  New  York  has  driven  many  corporations 
across  the  North  Eiver,  where  they  have  found  rent  cheaper, 
labor  more  plentiful  and  money  easily  obtained,  as  well  as 
taxes  lessened. 


340  JAMES  B.  DILL 

The  Bar. 

Another  result  of  the  corporate  policy  of  New  Jersey 
has  been  the  bringing  of  desirable  business  to  members  of 
the  bar  of  the  state. 

Questions  of  internal  corporate  management  are  rele- 
gated back  to  the  courts  of  New  Jersey  for  decision,  with 
the  result  that  the  members  of  the  bar  of  that  state  are 
busy  and  are  engaged  under  important  retainers. 

New  Jersey  is  today  the  stomi  center  of  the  great  cor- 
porate litigation. 

The  Legislature. 

The  Legislature  of  New  Jersey  is  undoubtedly  friendly 
to  corporations.  It  is  inclined  to  be  friendly  to  those  meas- 
ures which  tend  to  bring  corporations  to  the  state. 

Nevertheless  after  an  acquaintance  with  the  Legisla- 
ture of  New  Jersey  one  can  say  with  truth  that  there  is 
less  of  the  charging  of  the  "Black  Horse  Brigade"  at  Tren- 
ton than  according  to  report  is  witnessed  at  many  other 
state  capitals. 

One  reason  for  this  state  of  affairs  is  that  one  of  the 
influential  powers,  the  railroads,  is  recognizing  the  fact  that 
the  increase  of  corporations,  with  the  corresponding  in- 
crease of  corporate  returns,  safeguards  the  railroads  against 
oppressive  taxation. 

The  railroads  and  other  influential  factors  are,  however, 
aware  that  the  legislation  must  be  intelligent  and  reason- 
able, and  of  a  character  to  meet  public  criticism  from  the 
economic  point  of  view,  if  corporations  are  to  continue  to 
come  to  the  state.  Therefore  the  influence  of  the  legisla- 
ture is  largely  towards  that  which  is  right  in  corporate  legis- 
lation, and  it  is  safe  to  assert  that  a  *' strike"  measure 
rarely  sees  the  light  of  day,  after  having  been  referred  to 
committee. 


NEW  JERSEY'S  CORPORATE  POLICY        341 

The  Bench. 

A  strong  inducement  to  the  intellic^ont  eapitalist  to  eome 
into  New  Jersey  for  incorporation  is  the  liigh  character  of 
the  bench. 

The  great  bulwark  against  improper  legislation,  against 
pro-corporate  legislation  in  the  State  of  New  Jersey  has 
been  the  attitude  of  the  judges  in  the  administration  of 
the  corporation  laws. 

Tlie  independence  of  the  judges  and  their  tendency  to 
do  what  is  riglit  rather  than  what  seems  popular  is  not  to  be 
passed  by  without  comment. 

Tlie  decision  of  the  Court  of  Errors  and  Appeals  in  the 
American  Plaiting  Company  case,  holding  directors  liable 
for  the  distribution  of  unearned  dividends,  although  the  cor- 
poration was  not  insolvent,  brushing  away  the  mere  gram- 
matical distinctions,  is  an  example  of  the  position  taken  by 
the  judges  of  New  Jersey  in  regard  to  the  corporation  laws. 

V.  THE  INFLUENCE  UPON  OTHER  STATES. 

New  Jersey's  financial  success  appears  to  have  had  an 
unfortunate  influence  upon  the  corporate  policy  of  some 
other  states.  Some  charter-granting  states  have  looked 
at  the  question  of  success  or  failure  entirely  from  the  finan- 
cial standpoint.  They  have  assumed  that  corporations  went 
to  New  Jersey  solely  because  of  certain  popular  features  in 
her  laws.  They  have  assumed  that  these  popular  features 
were  the  so-called  ''liberal"  features,  and  so  they  have  at- 
tempted to  out-Jersey  New  Jersey  by  removing  every  re- 
striction and  salutary  limitation  upon  corporate  powers. 
Thoy  have  reduced  the  price  of  incorporation  to  a  mere 
nothing.  They  have  done  away  with  annual  taxes.  They 
grant  "roving"  charters  and  the  tendency  is  to  create 
**tramp"  organizations,  without  responsibility  and  with- 
out protection  to  the  public.    This  erroneous  view  of  New 


342  JAMES  B.  DILL 

Jersey's  corporate  policy  has  had  a  regrettable  influence 
upon  many  other  states. 

No  man  can  deny  the  fact  that  under  the  laws  of  New 
Jersey  many  corporations  are  organized  whose  methods 
both  of  organization  and  subsequent  procedure  are  inde- 
fensible. 

The  very  fact  that  the  large  and  strong  companies  were 
organized  under  New  Jersey's  laws  was  the  reason  why  the 
bubbles  and  shams  sought  to  be  incorporated  under  the 
same  laws,  that  they  might  claim  to  be  similar  to  the  great 
corporations  and  might  borrow  from  the  association  an 
appearance  of  strength. 

It  must,  however,  be  borne  in  mind  that  after  their 
methods  have  been  passed  upon  by  the  courts  of  New  Jer- 
sey, it  may  appear  that  the  promoters  of  such  corporations 
cannot  justify  their  position  under  the  New  Jersey  laws  but 
will  be  pronounced  violators  of  the  very  statutes  which 
they  assumed  would  protect  them. 

VI.    FURTHER  LEGISLATION  NEEDED. 

It  is,  however,  apparent  that  certain  additional  safe- 
guards for  the  public  are  requisite. 

There  is  today  a  lack  of  required  publicity. 

If  the  investor  could  obtain  at  the  outset  as  much  infor- 
mation about  the  make-up  of  the  company  when  its  securi- 
ties are  offered  upon  the  market  as  is  thrust  upon  these 
investors  when  a  receiver  is  appointed,  then  many  so-called 
industrials  would  never  see  the  light  of  day.  Could  the 
investor  know  when  the  security  is  first  offered  to  him  that 
out  of  $50,000,000  of  the  capital  $25,000,000  had  already 
been  divided  among  the  promoters,  issued  for  nothing  and 
representing  nothing,  the  promoters'  lack  of  capital  capital- 
ized, such  securities  would  never  reach  the  public. 

Such  facts,  however,  fail  to  come  to  the  knowledge  of 
the  investors  until  the  appointment  of  a  receiver,  the  promo- 


NEW  JERSEY'S  CORPORATE  POLICY        343 

ters  having  falleu  out,  or  the  nianagemont  being  no  longer 
able  to  carry  the  burden  of  the  promoters'  creation. 

In  order  that  the  industrials  shall  be  and  remain  invest- 
ments in  the  true  sense,  the  requirements  of  the  public  as 
investors  must  be  met  under  corporation  laws. 

AMiat  the  ])romoters  seek  is  secrecy. 

The  i)ublic,  as  investors,  should  have  a  legal  right  to  a 
reasonable  degi'ee  of  information. 

As  a  class  the  promoters  demand  the  privilege  of  issu- 
ing millions  for  nothing;  but  on  the  other  hand,  what  the 
investing  public  requires  and  is  legally  entitled  to,  is  some- 
thing for  a  dollar,  or  somebody  responsible  for  the  defi- 
ciency. 

Power  of  manipulation,  dark-closet  division  of  exorbi- 
tant percentages  of  the  securities,  and,  in  case  of  failure,  no 
personal  responsibility,  are  privileges  absolutely  antago- 
nistic to  the  best  interests  of  the  industrial  situation  today. 

It  is  not  only  necessary  to  have  such  laws  that  good 
companies  can  incorporate  imder  them,  but  in  the  same  code 
you  must  have  such  enactments  in  the  shape  of  ''thou  shalt 
nots"  that  bad  companies  dare  not  incorporate. 

A^I.    CONCLUSION. 

A  question  of  interest  to  the  bar  of  every  state  is  as 
to  the  true  basis  of  a  state  corporation  act.  We  recognize 
the  demands  of  modem  business  for  a  suitable  act.  We  see 
the  trend  towards  the  creation  of  business  companies.  We 
realize  that  the  corporation  laws  of  the  last  century  need 
remodeling  to  meet  the  legitimate  requirements  of  the  new 
centur}'. 

The  old  theory  as  to  the  state's  duty  in  creating  cor- 
porations, that,  being  creatures  of  the  state,  they  should  be 
guaranteed  by  it  to  the  public  in  all  particulars  of  responsi- 
bility and  management,  is  being  abandoned. 

Tlie  modcra  and  quite  opposite  theory  is  that,  in  the 


844  JAMES  B.  DILL 

absence  of  fraud  in  its  organization  or  the  conduct  of  its 
affairs,  an  ordinar}-  business  corporation  should  be  allowed, 
within  limits  excluding  banking,  insurance  and  quasi-public 
corporate  powers,  to  do  anything  that  an  individual  may  do. 

The  Massachusetts  Committee  on  Corporation  Laws  in 
its  report  (1903)  adopted  the  latter  theory. 

When  New  York's  political  leaders  rejected  the  Roose- 
velt Corporation  Act  of  1900,  the  state  lost  her  opportunity. 

They  misconceived  the  trend  of  affairs. 

I  am  of  the  opinion  that  the  passage  of  the  Roosevelt 
Act  would  have  aided  greatly  in  stemming  the  current  which 
was  gradually  breaking  down  salutarj^  restrictions  upon 
corporations  and  which  has  since  then  been  moving  in  in- 
creasing volume  and  wdth  increasing  swiftness — the  tend- 
ency to  make  corporation  laws  popular,  with  a  view  to  se- 
curing revenue  to  the  state  from  corporate  organizations. 

That  state  in  the  future  which  will  secure  to  itself  the 
best  corporations,  which  will  attract  incorporated  capital  as 
opposed  to  incorporated  wind,  will  not  be  the  state  which 
sets  the  standard  in  laxity,  but  the  state  which  shall  so 
frame  its  laws  as  to  conform  most  closely  to  the  principles 
of  honesty  in  organization  and  integrity  in  management. 


CORPORATION  REORGANIZATIONS  AND 
RECEIVERSHIPS.* 

BY  THOMAS  L.  GREENE. 

f  Formerly  President  of  tlic  Audit  Company  of  New  York.l 

Altlioiigli  as  has  already  boon  stated,  the  corporation 
fomi  is  best  adapted  for  those  bnsinesses  which  meet  a 
public  demand,  -wlioso  vohnno  of  tradinc^  or  traffic  or  man- 
ufacture is  apparently  steady,  and  whose  profits  under 
good  management  may  be  expected  to  be  reasonably  uni- 
form, and  although  under  such  conditions  insolvency  should 
be  rare,  yet  incorporated  companies  at  times  become  bank- 
rupt— that  is,  are  unable  to  pay  their  floating  or  funded 
debts.  If  such  corporate  insolvencies  in  any  line  of  busi- 
ness constitute  a  larger  percentage  than  is  shown  by  the 
general  average  throughout  the  United  States,  a  percent- 
age larger  either  in  the  ]")roportion  of  bankrupts  to  the 
whole  or  in  the  proportion  of  assets  to  liabilities,  then  it  is 
important  for  the  welfare  both  of  investors  and  of  the  pub- 
lic that  careful  investigation  should  be  made  to  ascertain 
the  causes  of  such  undue  percentages.  Perhaps  the  rea- 
sons for  such  largo  proportion  of  bankrupts  may  lie  in 
the  fact  that  the  earnings  of  the  company  from  some  cause 
have  been  reduced  so  fast  that  the  expenses  could  not  corre- 
spondingly ]ie  cut  down;  or  it  may  be  that  the  capitaliza- 
tion of  the  company  was  in  the  first  place  arranged  on  a 
false  l)asis;  or  perhaps  the  failure  may  have  come  from 
a  combination  of  those  causes.  Sometimes,  also,  wide- 
spread commercial  disasters,  such  as  tlie  failures  of  crops 
over  a  large  section  of  the  country,  may  accoimt  for  the 
temporary  embarrassment;  although  even  in  such  a  case 


*  From   the   P.rd   edition   of   Corporation    Finance.   G.    P.    Putnam's   Sons, 
New  York. 


346  THOMAS  L.  GREENE 

the  possibility,  in  a  concern  whose  finances  have  been  con- 
servatively managed,  ought  long  ago  to  have  been  taken 
into  account. 

But  from  whatever  cause  arising  or  whatever  the  per- 
centage may  be  of  those  companies  which  have  failed  to 
have  achieved  success,  the  fact  of  the  inability  of  any  com- 
pany to  pay  its  debts  brings  up  at  once  a  large  number  of 
fijiancial  problems  of  extreme  difficulty  and  delicacy.  The 
affairs  of  the  simple  trading  company,  when  forced  to  suc- 
cumb, may  prove  comparatively  easy  of  adjustment;  but 
not  so  with  large  companies.  Our  great  railway  systems, 
for  example,  have  grown  to  their  present  size  by  degrees 
through  the  construction  or  absorption  into  the  system  of 
lines  or  branches  once  independent,  or  which  may  yet  be 
nominally  considered  so.  The  credit  of  such  a  huge  rail- 
way system  is  also  a  matter  of  growth;  but  a  good  credit 
once  attained  does  not  yield  easily  to  the  first  rumor  of 
disaster.  The  managers,  properly  careful  for  the  interest 
of  the  shareholders,  put  the  best  face  upon  the  declining 
revenues  in  the  hope  that  the  deficit  may  be  but  temporary 
— and  indeed  by  helping  to  tide  over  a  period  of  embarrass- 
ment through  the  means  of  old-established  credit,  the  man- 
agers of  such  a  system  have  in  many  instances  really  saved 
the  property  for  the  shareholders.  In  other  cases,  how- 
ever, where  the  evil  was  too  deep-seated  to  be  removed  or 
where  the  embarrassment  continued  so  long  that  it  could 
be  no  longer  ignored,  the  confession  of  insolvency  has  found 
the  affairs  of  the  company  in  a  most  unfortunate  shape. 

The  receivers,  upon  appointment,  have  been  ordered  by 
the  court  to  pay  off  those  back  debts  which  properly 
should  have  been  discharged  at  the  time  of  their  incurring 
from  current  revenues,  but  which  were  allowed  to  accumu- 
late in  order  to  enable  the  managers  to  maintain  the  ap- 
pearance of  solvency.  As  these  claims  are  made  a  first 
lien  upon  the  property  either  with  or  without  the  issue 
of  receivers'  certificates,  usually  the  property  must  remain 


REORGANIZATIONS  AND  RECEIVERSHIPS  347 

in  reccivei*s'  liands  at  least  as  loug  as  it  may  ])0  necossaiy 
to  accumulate  from  the  revenues  sums  sufficient  to  provide 
for  these  prior  claims.  If,  after  a  time,  it  is  found  that 
the  payment  of  these  claims  from  revenues  is  impossible, 
or  where  receivers'  certificates  have  been  issued  for  this 
very  purpose  and  are  now  outstanding,  then  these  sums 
must  be  taken  into  account  by  the  reorganizers  of  the  com- 
pany as  so  much  which  must  be  raised  by  the  owners  of 
the  property  before  it  can  be  turned  over  to  them. 

In  addition  to  the  sums  of  money  thus  directly  re- 
quired, it  is  almost  always  found  that  other  cash  amounts 
are  also  necessary.    Since  a  railway  system  does  not  plunge 
at  once  into  insolvency,  it  usually  finds  itself  tending  in 
that  direction  for  a  longer  or  shorter  time  previous  to  the 
final  confession,  and  it  commonly  happens  during  these 
months  or  years  when  the  stress  of  the  circumstances  be- 
gan to  bear  hard  upon  them,  that  the  managers  have  omit- 
ted to  do  many  things  which  the  business  of  the  company 
really  required.    In  the  case  of  railways  the  roadbed  may 
have  been  long  neglected  without  absolutely  going  below 
the  standard  of  safety.     Repairs  to  wooden  bridges  or 
trestles  have  been  delayed  and  renewals  of  rails  and  ties 
have  been  put  off,  so  that  the  real  requirements  of  the  prop- 
erty are  not  revealed  until  a  receivership  makes  conceal- 
ment no  longer  advisable.    When  that  receivership  comes 
and  before  reorganization  plans  can  be   drawn  up,   the 
amount  of  money  necessary  to  be  spent  in  order  to  make 
good  all  depreciation  and  to  render  the  plant  capable  of 
the  most  economic  working  must  be  definitely  known.    This 
is  the  time,  too,  for  an  outlook  into  the  future  when  the 
possible  changes  in  transportation  rates  or  in  the  services 
demanded  should  be  met  by  some  arrangement  for  grant- 
ing to  the  reorganized  company  certain  sums  of  money 
year  by  year  for  this  future  use.    Altogether  the  cash  re- 
quirements for  the  present  and  for  the  future  constitute 
sums  which  must  be  raised  in  reorganization  either  by 


S48  THOMAS  L.  aREENE 

assessments  upon  the  shares  and  bonds  or — what  amounts 
to  the  same  thing — by  some  arrangement  which  will  allow 
of  a  prior  mortgage  upon  the  property  sufficient  to  accom- 
plish these  results.  Usually,  also,  it  is  necessary  that  the 
accounts  of  the  defaulting  company  should  be  gone  over 
carefully  in  order  that  the  real  earnings  of  the  property, 
unadulterated  through  bookkeeping  assets  or  suspense  ac- 
counts or  padding  of  any  kind,  should  be  ascertained. 

With  these  figures  before  them  and  with  the  outlook 
for  business  in  general  and  in  the  section  of  the  country 
immediately  concerned  in  particular,  the  banking  firm  or 
conunittee  is  able  to  determine  within  reasonable  limits 
what  the  earning  power  of  the  company  after  reorganiza- 
tion will  be.  Here,  then,  are  the  elements  of  the  problem 
at  the  beginning.  A  certain  amount  of  cash  must  be  raised 
to  pay  off  debts  and  to  make  good  the  deficiencies  in  the 
depreciation  account;  allowance  must  be  made  for  the  cash 
requirements  of  the  future;  and  finally  all  the  fixed  charges 
of  the  reorganized  company  must  be  brought  so  far  below 
the  assumed  earnings  as  to  give  to  the  new  bonded  capital 
a  good  standing  and  credit  at  once  upon  all  the  exchanges. 

It  having  been  determined  to  what  extent  the  present 
bondholders  and  shareholders  must  suffer  loss  in  order  to 
bring  the  capital  of  the  new  company  within  the  earning 
limits  at  the  time  of  reorganization,  the  next  problem  is  the 
division  of  this  loss  among  the  old  security  holders.  This 
is  a  task  demanding  the  widest  knowledge  combined  with 
the  best  financial  judgment.  Under  our  assumption  the 
railway  system,  now  insolvent,  is  composed  of  many  dif- 
ferent parts,  each  having  upon  it  bonds  varying  in  value, 
in  interest  charges,  and  in  length  of  time  to  maturity, 
whose  liens  upon  the  various  properties  may  also  be  so 
interlaced  as  to  make  their  disentanglement  a  very  diffi- 
cult thing  indeed.  Very  likely  there  are  prior  lien  mort- 
gages upon  the  older  parts  of  the  road  on  which  the  interest 
charges  have  unquestionably  been  earned.    Where  such  is 


REORGANIZATIONS  AND  RECEIVERSHIPS  349 

oloarly  tlic  caso,  sncli  ])on(ls  should  not  Ix'  asked  to  siir- 
roiidor  any  part  of  their  ]irineipal  or  interest.  A  funda- 
mental axiom  in  corporation  finaneierinp^  is  that  bonds 
which  are  imquestionably  good  shonhl  unquestionably  be 
paid.  Nothing  tends  to  throw  discredit  u])on  corporation 
securities  so  much  as  a  lack  of  di-scrimination  in  cases  of 
insolvency  between  bonds  which  are  good  and  those  which 
are  not. 

Perhaps  there  is  also  a  first  mortgage  upon  the  entire 
system,  whose  interest  has  been  earned;  if  so,  the  loss  should 
fall  upon  the  junior  securities;  or  perhaps  one  of  the  diffi- 
culties of  reorganization  begins  at  this  point.  It  may  be 
that  the  main  line  has  earned  the  interest  on  these  first- 
mortgage  bonds,  to  judge  from  the  statements  prepared  in 
the  auditor's  office;  but  it  is  important  to  inquire  whence 
comes  the  traffic  whose  carriage  has  3'ielded  this  profit. 
There  may  be  branch  lines  which  give  to  the  system  so 
much  of  its  volume  of  business  that  without  them  inter- 
est on  the  first-mortgage  bonds  would  not  have  been 
earned;  it  may  be  that  valuable  terminals  in  the  large  cities 
are  occupied  by  the  company  subject  to  mortgages  of  their 
own. 

Or,  again,  perhaps  contracts  of  various  kinds  have 
been  entered  into  with  connecting  roads  whieh  on  their 
face  arc  improfitable,  and  yet  if  those  contracts  were  an- 
nulled the  resulting  indirect  loss  to  the  company  might 
seriously  imperil  the  interest  on  the  first  mortgage  which 
we  are  considering.  ^Manifestly,  in  the  face  of  such  compli- 
cations, it  will  not  do  to  say  that  interest  on  tliese  first- 
mortgage  l)onds  has  been  earned  and  should  be  paid,  while 
at  the  same  time  no  allowance  is  made  for  interest  upon 
the  teraiinal  ])onds  or  branch-line  obligations  or  contracts 
with  connecting  lines.  If  it  is  a  question  of  division  of  the 
losses  between  them,  the  exact  proportion  which  each 
should  suffer  can  only  be  detennined  after  a  careful  search 
into  the  whole  matter  and  after  a  full  investigation  into 


350  THOMAS  L.  GREENE 

the  claims  of  each  one  of  these  from  a  transportation  point 
of  view. 

It  is,  in  a  majority  of  cases,  useless  for  the  holders  of 
bonds  having  a  lien  upon  a  specific  piece  of  road  to  think 
of  foreclosing  their  mortgage  and  taking  the  property  cov- 
ered by  it  out  of  the  system  to  make  it  independent.    An 
exception,  of  course,  must  be  made  in  the  cases  of  prop- 
erty such  as  a  terminal  in  a  large  city,  which  may  be  es- 
sential to  the  business  of  the  defaulting  company  and  yet 
which  may  be  so  situated  as  to  be  easily  turned  over  to  and 
used  by  some  other  company.  In  such  cases,  of  course,  there 
is  no  alternative  but  to  keep  such  terminals  in  the  system 
by  paying  interest  upon  the  bonds;  usually  the  courts  are 
quick  to  recognize  the  exigencies  of  the  situation  and  to 
authorize  the  receivers  to  pay  such  interest  even  at  the 
expense  of  the  remaining  parts  of  the  trust  estate.    Usual- 
ly, however,  a  piece  of  property,  even  though  covered  by 
a  separate  mortgage,  finds  its  chief  value  as  a  component 
part  of  the  system  as  a  whole.    The  reason  for  the  amalga- 
mation of  separate  railways  into  one  system  is  that  the 
business  as  a  whole  may  be  administered  to  the  best  ad- 
vantage of  all.    Under  these  conditions  the  individuality 
of  any  one  part  of  the  system  is  in  time  lost  and  cannot  be 
easily  regained  even  under  a  separate  ownership  through 
foreclosure  of  that  particular  mortgage.     There  is  some- 
thing, therefore,  beyond  mere  words  in  the  disinclination 
so  often  stated  by  the  courts  to  allow  any  **  disintegration 
of  the  system,"  and  there  is  likewise  good  reason  for  the 
further  order  that  at  any  sale  for  the  purposes  of  reorgan- 
ization the  whole  shall  be  offered  as  one  parcel.    This  is 
the  true  poHcy,  not  only  from  the  point  of  view  of  the  in- 
vestor, which  we  have  just  been  considering,  but  also  from 
that  of  the  public  whose  facilities  for  quick  and  cheap 
transportation  would  be  seriously  interfered  with,  were  an 
old  system  allowed  to  be  broken  into  its  separate  parts 
by  reason  of  differences  of  opinion  between  the  bondhold- 


REORGANIZATIONS  AND  RECEIVERSHIPS  351 

ers  as  to  the  values  ol'  their  respective  mortgages.  The 
same  reasoning  with  modifieations  suited  to  the  circum- 
stances apijlies  to  corporations  other  than  railways  which 
have  been  conducting  large  business  operations. 

Stockholders  to  whom  belong  all  the  profits  of  the  enter- 
prise should  under  ordinary  circumstances  be  willing  to 
bear  the  losses.  It  is  upon  this  principle  that  the  cash 
requirements  of  an  insolvent  company,  which  have  just 
been  referred  to,  are  usually  made  up  by  an  assessment 
upon  the  shares.  But  this  principle  is  itself  limited  by 
expediency.  If,  under  the  influence  of  impending  trouble 
and  actual  insolvency,  the  quotations  for  the  shares  on 
the  exchanges  have  fallen  to  very  low^  figures,  a  large  as- 
sessment levied  upon  each  share  might  indeed,  if  carried 
out,  result  in  the  wiping  out  of  such  stock  under  a  reorgan- 
ization, but  would  not  bring  into  the  treasury  of  the  new- 
company  any  cash;  the  old  shareholders  would  prefer  to 
lose  their  holdings  rather  than  to  pay  the  assessment  de- 
manded, unless  they  were  convinced  that  the  prices  of  the 
new  shares  upon  the  exchanges  after  reorganization  would 
at  least  be  higher  than  the  amount  of  the  assessment.  If 
the  shares  alone  are  asked  to  furnish  the  money  for  the 
cash  requirements  and  at  the  same  time  to  stand  the  ])runt 
of  the  reorganization  generally,  the  new  stock  to  be  given 
in  exchange  for  the  assessment  might  be  of  little  value. 
From  the  nature  of  the  case  the  equities  of  a  reorganization 
cannot  be  proved  like  a  mathematical  pro])lem,  but  are 
matters  of  individual  judgment;  hence  able  lawyers  em- 
ployed by  aggrieved  shareholders  are  often  able  to  bring 
forward  facts  and  arguments  to  such  an  extent  as  to  make 
doubtful  or  delay  the  carrying  out  of  any  plan  of  reorgan- 
ization to  which  their  clients  are  unanimously  opposed. 
More  than  that,  the  mortgages,  under  whose  terms  the 
bondholders  must  act  in  foreclosing,  often  contain  sections 
whose  exact  meaning  perhaps  is  doubtful,  or  whose  pro- 
visions cannot  be  quickly  carried  out,  offering  chances  for 


352  THOMAS  L.  GREENE 

long  legal  delays.  It  is  sometimes  possible  for  tlie  share- 
holders to  oppose  the  foreclosure  of  a  mortgage  so  skilfully 
as  to  make  the  carrying  out  a  matter  of  years.  For  all 
these  reasons  it  is  customary  in  drawing  up  plans  of  re- 
organization to  consult  the  so-called  "rights"  of  the  stock- 
holder to  as  great  a  degree  as  is  consistent  with  justice  to 
all  concerned. 

The  practical  effect  of  this  small  deference  to  the  share- 
holder is  to  put  a  part  of  the  losses  under  reorganization 
upon  the  junior  securities;  that  is,  upon  those  mortgages 
which  of  course  come  ahead  of  the  stock,  but  whose  lien 
upon  the  property  is  subsequent  to  the  older  bonds.  Per- 
haps the  cash  requirements  already  spoken  of  may  be  ar- 
ranged for  by  an  assessment  of  several  dollars  upon  each 
share  of  stock  and  also  upon  the  junior  bonds.  Sometimes 
when  the  future  looks  hopeful,  the  holders  of  the  senior 
bonds  may  be  asked  to  forego  their  interest  for  a  while  or 
to  refund  their  coupons  into  a  separate  loan  for  which  they 
may  receive  other  securities  under  the  plan. 

In  the  history  of  American  railwa}^  reorganizations,  it 
has  been  a  common  thing  to  find  certain  bonds  or  shares 
given  to  the  old  holders,  to  represent  the  cash  assessments 
which  they  were  asked  to  pay,  or  the  losses  in  principal 
or  interest  to  which  they  were  asked  to  submit.  Such  a 
course  is  justified  by  business  conditions  in  the  United 
States.  In  America  values  are  largely  determined  by  ref- 
erence to  the  future.  Quotations  of  the  corporation  stocks 
or  bonds  upon  the  exchanges  are  governed  by  two  consid- 
erations— the  present  earnings  and  the  expectation  for  the 
future.  Such  a  method  of  estimating  values  is  to  be  ex- 
pected in  a  large  country  not  yet  fully  developed,  whose 
agricultural  and  mineral  possibilities  are  great,  and  which 
on  the  average  is  increasing  in  wealth  and  in  the  volume 
of  business  year  by  year.  The  very  pace  by  which  indus- 
try usually  advances  leaves  the  way  open  for  temporary 
depreciations,  and  these  for  a  time  may  curtail  business 


REORGANIZATIONS  AND  RECEIVERSHIPS  353 

to  such  an  extent  as  to  leave  a  railway  or  other  corpora- 
tion unable  to  meet  its  ol)li,i,^ations.  If,  undcu*  these  cir- 
cumstances, reorganization  becomes  necessary,  it  is  not  for- 
gotten that  the  future  may  have  in  store  for  the  company 
greater  earnings  than  are  now  annually  being  obtained. 
Hence  it  is  in  accordance  with  business  facts  that  the  hold- 
ers of  bonds  or  shares  which,  under  the  stress  of  present 
necessity,  must  sacrifice  something,  should  ask  that  some 
evidence  of  their  former  claims  against  the  company  be 
granted  them.  They  ask  for  this  evidence  so  that  if  the 
company  in  future  years  should  earn  as  much  as  in  times  of 
former  prosperity  or  indeed  anything  at  all  beyond  the 
present  standard,  these  old  postponed  claims  may  then  be- 
come alive  again  and  be  worth  something  to  their  holders. 
Xearly  all  railway  reorganizations  recognize  the  justice  of 
this  positi(m,  and  the  plans  are  arranged  accordingly. 

Another  reason  why  the  method  of  giving  some  evi- 
dences of  inde])tedness  in  exchange  for  assessments  or  bond 
losses  is  iDoi3ular,  lies  in  the  fact  that  investment  sentiment 
seems  better  satisfied  where  paper  of  some  kind  is  given 
to  bondholders  in  return  for  their  sacrifices,  than  where 
such  sacrifices  are  demanded  without  it.  This  is  true  even 
in  cases  where  the  intrinsic  values  of  the  two  pieces  of 
1  taper  are  no  larger  than  that  of  one  alone  would  be.  But 
even  where  intrinsically  the  same,  it  is  a  common  expe- 
rience that  the  quotations  for  the  two  are  larger  than  would 
be  that  for  one  alone.  The  great  majority  of  mankind 
are  optimists  and  deal  with  corporations'  shares  and  se- 
curities optimistically.  The  natural  hopes  of  investors, 
therefore,  serve  to  give  to  an  income  bond  or  a  share  of 
stock  dependent  upon  future  earnings,  a  quotable  value 
which  through  sentiment  may  be  considerably  higher  than 
that  justified  by  the  present  position  of  the  company. 

For  these  reasons  it  may  be  possible  in  an  easily  ar- 
ranged plan  of  reorganization  to  give  to  the  holder  of  a 
discredited  bond  a  new  bond  for  a  part  of  his  claims,  and  in 

B— 11— 2S 


354  THOMAS  L.  GREENE 

addition  an  income  bond  or  shares  of  preferred  stock,  in 
such  proportion  that  by  selling  both  new  issues  the  old 
bondholder  may  be  able  to  get  back  his  entire  investment 
and  really  lose  nothing.  Such  a  procedure,  however,  is 
oftentimes  possible  only  when  the  capitalization  of  the  new 
company?"  is  largely  increased.  If  regard  is  had  to  the  pres- 
ent time  only  and  to  the  demands  of  the  present  holders  of 
the  bonds  of  the  defaulting  company,  such  a  reorganization 
will  be  considered  a  success;  and  it  is  not  to  be  denied  that 
the  wish  to  satisfy  present  demands  is  legitimate  so  far  as 
it  may  be  proper.  But  if  we  regard  the  day  of  reckoning, 
such  a  reorganization  may  not  be  defensible.  The  new  cap- 
italization may  indeed  be  made  to  mature  long  years  hence, 
but  when  that  maturity  arrives  and  the  increased  principal 
must  be  met,  the  wrongfulness  of  a  plan  which  increases  the 
capitalization,  even  though  without  an  increase  of  obliga- 
tory charges  at  the  moment,  becomes  apparent.  And  if, 
meanwhile  other  disasters  should  overtake  the  corpora- 
tion, the  old  injudicious  arrangement  of  increased  capitali- 
zation will  make  it  all  the  more  difficult  to  secure  to  the 
company  such  new  money  or  such  concessions  as  it  may 
need. 

When  the  holders  of  discredited  bonds  are  asked  to  sur- 
render a  part  of  their  principal  and  to  accept  a  smaller  rate 
of  interest,  an  income  bond  to  represent  the  losses  may  be 
offered  to  them.  To  satisfy  the  conditions  of  the  problem, 
this  bond  must  be  of  such  a  character  as  to  be  quoted  in  the 
Street  at  such  a  figure  as  will  reimburse  the  old  holders  for 
their  sacrifices;  at  the  same  time,  of  course,  the  object  of  the 
reorganization  must  be  kept  in  view — that  is,  to  reduce  the 
fixed  charges.  To  satisfy  both  these  conditions,  the  income 
bond  must  be  made  contingent  upon  earnings  on  the  one 
hand,  and  on  the  other  must  have  also  such  obligatory  fea- 
tures as  will  commend  it  to  investors.  Although  these  two 
features  are  contradictory,  such  a  bond  has,  in  a  number  of 
cases,   been  arranged  for  in   American  reorganizations. 


REORGANIZATIONS  AND  RECEIVERSHIPS  355 

Experience  lias  shown  wiiat,  indeed,  niij^lit  have  been  ex- 
pected, that  snch  a  form  of  corporation  ('a})ital  works  out  no 
better  in  pi'actice  tlian  in  theoiy.  On  the  one  side,  the 
liolders  of  such  income  or  preference  bonds  are  continually 
clainiinc:  that  certain  profits  earned  by  the  railway  company 
should  be  paid  over  to  them.  On  the  other  hand,  the  prin- 
cipal being  an  obligation,  these  income  or  preference  bonds 
often  stand  in  the  way  of  proper  management  of  the  fi- 
nances of  the  company.  As  every  growing  system  has  in- 
creasing needs,  the  managers  find  easy  opportunities  where 
the  expenditure  of  a  few  thousands  of  dollars  would  biing 
a  large  return  in  the  way  of  increased  traffic  or  profit;  yet 
they  are  debarred  from  borrowing  money  because  the  in- 
come mortgages  deny  them  that  privilege.  The  result  of 
this  curious  position  is  that  the  company  does  not  progress 
as  it  ought,  the  acuteness  of  the  managers  being  mean- 
while exercised  to  devise  means  whereby  the  too  stringent 
terms  of  the  income  mortgage  may  be  made  practically  of 
no  effect.  For  illustration,  a  company  may  need  larger 
terminals,  and  these  terminals  may  be  the  means  of  increas- 
ing the  profits  which  should  go  toward  paying  something 
upon  the  income  bonds.  Being,  however,  unable  in  its  o^vn 
name  to  borrow  the  money  to  pay  for  these  terminals  (be- 
cause the  new  mortgage  cannot  be  put  ahead  of  the  income 
bonds),  the  company  may  arrange  to  have  them  held  in 
another  name,  meanwhile  entering  into  a  contract  with  the 
terminal  company  to  pay  over  to  the  latter  certain  sums  for 
the  use  of  the  sui)posed  terminals.  Such  a  terminal  charge 
per  passenger  and  per  ton  is  agreed  upon  as  will  be  enough 
to  meet  the  interest  on  the  new^  terminal  bonds;  such  ter- 
minal charges  being  meanwhile  added  to  the  working  ex- 
penses of  the  system.  In  this  way  ])ractically  the  interest 
on  the  terminal  bonds  is  paid  for  by  the  parent  company, 
although  the  temis  of  the  income  or  preferred  mortgage 
would  forbid  such  a  thing  if  attempted  directly.  All  these 
considerations  being  taken  into  account,  the  quotations  for 


356  THOMAS  L.  GREENE 

these  income  bonds  often  rule  so  low  upon  the  stock  ex- 
changes as  to  make  a  large  issue  necessary  if  the  original 
losses  of  the  bondholders  under  reorganization  are  to  be 
thus  made  up.  As  a  consequence,  the  capitalization  of  the 
new  company  is  much  larger  than  that  of  the  old. 

Preferred  stocks  given  in  exchange  for  the  sacrifices  of 
the  old  bondholders  are  much  better  than  income  bonds 
from  the  point  of  view  of  good  corporation  financiering. 
Preferred  shares  may  thus  properly  represent  deferred 
claims.  There  is  no  peremptory  obligation  resting  upon 
the  company  to  pay  an  annual  dividend  upon  these  shares, 
particularly  if  they  are  made  non-cumulative.  To  make 
dividends  on  preferred  shares  cumulative  is  not  good  policy 
except  in  extreme  cases,  because  it  lays  the  shares  open  in 
modified  degree  to  the  reasoning  which  has  just  been  ap- 
plied to  the  income  bonds.  Preferred  shares,  too,  have  vot- 
ing power,  and  their  holders,  even  though  small  in  number, 
are  thus  put  in  the  way  of  defending  their  own  interests  in 
the  board  of  directors  or  before  it.  Moreover,  while  an 
excessive  capitalization  represented  by  shares  is  an  evil  and 
gives  rise  to  some  objectionable  conditions  in  our  corpora- 
tion finance,  yet  it  is  by  no  means  so  dangerous  as  excessive 
capital  represented  by  bonds.  Altogether,  therefore,  pre- 
ferred shares  represent  deferred  claims  under  reorganiza- 
tion much  better  than  can  income  or  preference  bonds,  and 
in  all  cases  of  reorganization  should  be  issued  for  such  pur- 
poses where  the  laws  of  the  state  will  allow  of  such  issue. 
The  issue  of  preferred  shares  in  exchange  for  assessments 
paid  by  the  holders  of  common  stock  is  often  made  expedi- 
ent by  the  sentimental  wish  of  the  assessed  shareholder  to 
have  some  special  piece  of  paper  to  represent  his  payments. 

Legally  the  owner  of  a  single  bond  is  entitled  to  all  the 
rights  and  advantages  which  the  terms  of  the  mortgage  may 
give.  It  is  becoming  more  common,  however,  to  limit  the 
rights  of  a  small  minority  by  modifying  somewhat  the  ex- 
treme language  of  the  mortgage.    Railway  mortgages  now 


I 


REORGANIZATIONS  AND  RECEIVERSHIPS  357 

usually  provide  that  the  trustoos  shall  take  loc^al  prorood- 
in^s,  shall  declare  the  principal  due  and  shall  ])r()('('('d  t<> 
foreclose,  only  when  a  certain  percentage  of  the  ])()ndhold- 
ers  request  it  so  to  act.  Custom  yet  gives  to  one  half  of  the 
bonds  outstanding^,  or  sometimes  to  a  smaller  peiventage, 
the  right  to  demand  the  satisfaction  of  their  mortgage 
through  the  trustee.  But  the  legal  right  of  foreclosure  is 
one  thing  and  the  commercial  expediency  is  often  quite  an- 
other. A  system  with  a  number  of  different  classes  of 
bonds  upon  it  being  in  difficulties,  the  holders  of  some  of 
the  junior  issues  may  be  unwilling  to  agree  to  any  plan  of 
reorganization  whatever,  or  may  find  fault  with  the  pro- 
portion of  new  securities  to  be  given  them  under  the  adver- 
tised plan.  In  either  case  one  half  or  more  of  the  bond- 
holders have  the  power  to  compel  the  trustees  to  begin  fore- 
closure proceedings.  If  these  proceedings  are  carried 
through,  these  same  bondholders  must  be  prepared  to  bid 
in  the  property  in  order  to  secure  their  debt.  This,  in  turn, 
involves  "financing"  the  new  company.  They  must  often 
be  prepared  to  furnish  money  enough  at  the  sale  to  pay  all 
the  floating  and  current  indebtedness,  and,  if  they  would 
make  a  success  of  their  new  company,  they  must  also  be 
ready  to  furnish  the  capital  which  under  our  assumed  con- 
ditions the  system  needs  in  order  to  ])e  put  in  good  condi- 
tion and  ready  for  economical  working.  These  two  re- 
quirements may  call  for  so  much  money  that  the  bondhold- 
ers may  well  hesitate  ))efore  they  enter  upon  such  an  under- 
taking. Holders  of  corporation  securities  are  scattered 
throughout  the  country,  and  ])erhaps  many  of  the  bonds  are 
held  in  Europe.  A  scattered  majority  stands  rather  help- 
less before  such  a  problem;  the  trustee  will  not  act  unless 
expenses  are  guaranteed  to  it,  while  no  banking  house  will 
undertake  the  formation  of  a  new  company  unless  it  sees 
clearly  that  the  conditions  favor  success,  and  unless,  too,  it 
has  the  support  of  a  majority  of  the  mortgage  issues.  It  is 
customary  now  for  committees  to  be  foi-med  to  protect  the 


358  THOMAS  L.  GREENE 

interests  of  the  various  securities  involved  in  the  insol- 
vency. If  such  committee  succeed  in  getting  the  greater 
part  of  the  securities  deposited  with  it,  it  becomes  a  factor 
in  the  reorganization;  yet  even  when  this  is  the  case,  such 
committee  may  not  be  willing  to  furnish  the  large  sums  nec- 
essary to  finance  the  new  company  in  a  manner  favorable 
to  the  particular  bonds  held  by  them. 

It  will  thus  be  seen  that  it  is  better  for  the  bondholders 
of  a  bankrupt  railway  system  to  accept  a  plan  of  reorganiza- 
tion, if  found  equitable,  rather  than  to  attempt  to  buy  in  the 
property  for  themselves.  If  the  proposed  plan  of  rehabili- 
tation is  belived  by  a  majority  of  all  bondholders  to  be  un- 
fair, it  will  usually  fall  to  the  ground  through  lack  of  sup- 
port; that  is,  a  plan,  to  be  carried  out  successfully,  must 
have  the  active  assistance  of  a  majority  of  the  bondholders 
given  to  it  through  a  deposit  of  bonds  of  those  holders  who 
assent  to  the  plan.  No  matter  how  strong  the  language 
of  the  mortgage,  the  bonds  issued  under  it  are  worth  only 
what  the  commercial  conditions  of  the  company  allow; 
hence  it  is  better  for  the  holders  of  defaulted  bonds  to  ac- 
cept a  plan  when  found  upon  examination  to  be  equitable, 
than  to  insist  upon  their  legal  rights,  for  their  bonds  are 
worth  only  what  their  proportion  of  the  total  value  of  the 
company's  property  comes  to;  they  could  not  get  any  more 
than  that  proportion  even  though  they  insisted  upon  the  full 
terms  of  the  mortgage.  Corporation  reorganizations  re- 
solve themselves  into  commercial  problems  rather  than 
legal. 

As  business  conditions  change  rapidly  in  a  developing 
country,  it  frequently  happens  that  a  company  when  in- 
solvent and  about  to  be  reorganized  wishes  to  get  rid  of 
certain  branches,  guaranties,  leases,  or  other  contracts 
which  in  the  course  of  time  may  have  proven  themselves 
very  unprofitable.  So  long  as  the  corporation  is  solvent, 
the  question  of  the  justice  of  living  up  to  its  contracts  does 
not  arise.    When,  however,  it  confesses  that  it  is  unable  to 


REORGANIZATIONS  AND  RECEIVERSHIPS  359 

pay  its  debts,  then  its  linaucial  rohal)ilitation  becomes  a 
question  of  commercial  value,  and  in  this  light  it  is  deemed 
proper  for  a  reorganization  committee  to  plan  for  a  cutting 
off  of  those  branches,  leases,  or  other  contracts  which  are 
recognized  as  burdensome  upon  the  company.  Sometimes  a 
company  is  rehabilitated  without  a  sale  of  its  property  at 
foreclosure.  In  such  happy  cases  it  has  been  found  pos- 
sible to  make  such  an  arrangement  among  all  the  bondhold- 
ers and  stockholders  as  enables  the  old  company  to  rear- 
range its  mortgages  and  shares  and  go  on  with  its  business 
under  the  existing  charter.  In  cases,  however,  where  un- 
profitable branch  lines  have  had  to  be  supported  on  onerous 
contracts  carried  out,  the  determination  to  relieve  the  com- 
pany from  these  burdens  proves  a  stumbling-block  to  the 
easy  fonn  of  rehal)ilitation  just  referred  to;  for  whenever  a 
company  is  rehabilitated  l)y  a  change  in  its  financial  ar- 
rangements and  proceeds  with  its  business  under  its  old 
charter,  all  the  contracts,  guaranties,  and  leases  which  it 
may  once  have  entered  into  are  kept  alive  and  become 
claims  against  the  company.  Tlie  only  method  of  getting  rid 
of  such  burdensome  guaranties  or  leases  is  through  the 
foreclosure  of  some  one  of  the  mortgages  and  a  sale  of  the 
property  and  franchises  to  another  company.  If  there  is  a 
charter  in  existence  whose  privileges  are  such  as  to  meet 
the  conditions  of  the  insolvent  company,  then  the  property 
may  be  sold  and  conveyed  to  a  company  organized  Tuider  it. 
If  this  is  not  possible,  then  a  new  charier  must  be  ol)tained 
in  the  state  or  states  concerned. 

It  is  at  this  point  that  new  difficulties  arise.  In  many 
cases  the  charters  under  which  the  insolvent  systems  are 
now  operating  were  granted  many  years  ago  and  contain 
privileges  which  could  not  now  be  obtained  from  any  legis- 
lature or  from  Congress.  It  may  be  that  the  state  which 
originally  gave  the  franchise  has,  since  granting  that  char- 
ter, enacted  new  laws  which  forbid  ])erhaps  the  very  things 
that  the  old  charter  permits.     Under  these  circumstances 


360  THOMAS  L.  GREENE 

the  foreclosure  of  one  of  the  mortgages  on  the  system  and 
the  sale  of  the  property  to  a  company  formed  under  a  new 
charter  might  involve  the  surrender  of  so  much  of  the  old 
commercial  rights  as  would  render  the  success  of  the  enter- 
prise doubtful.     Here,  again,  it  may  be  expedient  for  the 
holders  of  a  senior  or  a  junior  mortgage  to  make  some  con- 
cessions which  will  allow  of  a  restoration  of  the  plant  into 
the  hands  of  the  original  company,  rather  than  to  insist 
upon  the  carrying  out  of  the  provisions  of  the  mortgage, 
which,  though  legally  clear,  are  impossible  of  fulfillment  ex- 
cept at  the  expense  of  the  holders  of  the  bonds  themselves. 
When  systems  having  old  and  valuable  state  or  federal 
charters  have  also  burdensome  leases  or  contracts,  the  ad- 
justment becomes  one  of  great  difficulty.    If  the  present 
charter  be  retained,  the  onerous  contract  is  still  in  force 
even  though  temporarily  disowned  by  the  receivers ;  if  it  is 
sought  to  throw  off  these  contracts  by  a  sale  to  a  company 
newly  organized  under  present  laws,  an  equally  large  or 
even  larger  loss  may  be  entailed.    If  neither  party  will 
yield  something  under  these  conditions,  the  property  may 
stay  in  the  hands  of  receivers  much  longer  than  would  be 
otherwise  necessary,  and  longer  too  than  the  courts  prefer 
to  keep  the  control  in  their  possession.    If  at  last  neither 
will  yield,  it  becomes  a  choice  of  evils.    It  may  be  that  dur- 
ing the  period  of  embarrassment  the  general  business  of  the 
company  has  suffered  to  such  an  extent  that  the  senior 
bonds  are  affected.  It  then  becomes  a  question  as  to  whether 
these  senior  bonds  will  foreclose  their  mortgage  and  let  the 
property  go  for  what  it  will  bring;  in  such  cases  the  break- 
ing up  of  large  and  important  systems  is  a  thing  to  be 
lamented  in  the  interest  of  the  public  no  less  than  that  of 
the  creditors  themselves. 

Before  insolvent  companies  undergo  reorganization 
there  is  usually  a  period  of  receivership.  The  practice  of 
operating  insolvent  railways  through  court  oJBficers  appoint- 
ed for  the  purpose  is  not  yet  definitely  settled  either  as  to 


REORGANIZATIONS  AND  RECEIVERSHIPS  361 

tlic  niotliods  of  working  or  as  to  tlio  legal  docl  j-iiics  invohcd, 
the  whole  matter  being  yet  in  a  st^ite  of  evolution.  Tt  is  the 
boast  of  our  law  that  it  changes  to  moot  the  changing  de- 
mands of  connneree  as  business  becomes  more  conijilex  and 
the  rules  goveraing  it  necessarily  more  involved;  so  as  re- 
gards railway  receiverships  our  present  situation  is  the  re- 
sult of  a  compromise  between  the  terms  of  railway  mort- 
gages and  the  commercial  conditions  under  which  railway 
operations  are  carried  on. 

The  original  idea  of  appointing  a  receiver  to  take  charge 
of  the  property  of  a  firm  or  individual  was  that  the  business 
might  be  wound  up  with  as  little  delay  as  possible  and  the 
assets  sold  and  distributed  to  the  creditors  in  some  equit- 
able proportion.  As  corporations  became  more  common, 
taking  the  place  of  firms  and  individuals,  the  same  idea  was 
applied  to  them  when  insolvent.  They  were  placed  in  the 
hands  of  receivers  in  order  that  their  affairs  might  1)0  closed 
up  with  the  least  possible  delay  by  dividing  the  assets 
among  the  creditors  in  the  proportion  to  which  it  was  sho^^^a 
they  w^ere  entitled.  It  was  inevitable  that  the  (question  of 
the  proper  method  of  treating  insolvency  among  railway 
companies  should  arise.  From  small  beginnings  the  num- 
ber of  miles  of  i-ailway  in  the  United  States  increased  rapid- 
ly until  now,  judged  by  the  magnitude  of  the  property  in- 
vested and  the  amount  of  business  done,  the  railways  fonn 
perhaps  our  largest  industry,  certainly  one  of  the  most  com- 
])lex.  Through  one  cause  or  another  it  was  inevitable  that 
l)ankruptcy  should  increase  among  these  rail  carriers  as 
their  mileage  increased;  and  in  such  cases  also  it  was  nat- 
ural, as  in  the  cases  of  fiims  or  small  corporations,  that  re- 
ceivers should  be  appointed  pending  a  settlement  of  the  in- 
solvent debtor's  affairs.  But  here  a  new  question  arose. 
A  trading  finn  or  corporation  imable  to  pay  its  debts  could 
be  wound  up  and  its  assets  distributed  to  its  creditoi-s  with- 
out loss  to  the  community.  Other  traders  could  take  their 
places  and  business  would  go  on  as  before;  but  it  was  other- 


362  THOMAS  L.  GREENE 

wise  with  the  railways.    It  was  quickly  seen  that  great 
states  and  sections  of  states  depended  upon  the  continued 
operation  of  these  railways  for  the  transaction  of  their 
everyday  business,  for  supplies  of  clothing  and  manufac- 
tured goods,  and  even  for  meat  and  bread.     Wliatever  the 
outcome,  the  trains  must  be  kept  running.     Since,  in  the 
course  of  time,  local  railways  have  grown  into  systems,  it 
was  found  that  the  interests  involved  in  these  systems  were 
so  enormous  that  their  combined  assets  could  not  be  easily 
sold  as  one  parcel  to  any  one  person  or  company,  or  sold 
separately  without  breaking  up  the  systems.    Hence,  until 
the  serious  question  of  reorganization  or  sale  was  settled, 
the  receivers  of  these  systems  must  continue  to  run  the 
trains  in  the  interest  of  the  public.     As  these  necessary  ad- 
justments were  often  found  very  complicated,  requiring  a 
long  time  for  negotiations  and  final  agreement,  the  re- 
ceivers appointed  by  the  courts  were  placed  for  the  time 
being  in  the  position  of  railway  managers.     They  were  con- 
fronted with  technical  problems  of  much  practical  impor- 
tance.   They  were  required  to  become  familiar  with  dis- 
puted questions  concerning  reasonable  rates  and  their  rami- 
fications.   The  conflicting  claims  of  cities  and  towns  as  to 
charges  which  should  be  relatively  fair  to  each  were  pressed 
upon  their  attention.     In  short,  it  was  required  that  re- 
ceivers should  be  able  to  formulate  for  the  operation  of 
the  properties  in  their  charge  a  policy  which  should  be 
equitable  to  the  capitalists  whose  money  was  invested  in 
the  road,  to  all  the  sections  served  by  the  railway,  and  to 
the  general  traveling  and  shipping  public.    Needless  to  say, 
the  success  of  such  a  task  required  men  of  administrative 
ability,  with  the  further  result  that  the  courts  through 
their  appointed  officers  were  obliged  to  decide  upon  the 
details  of  administration. 

It  was  the  practice  at  first  for  receivers  to  be  asked  for 
solely  by  certain  creditors  of  the  company  in  order  that 
their  property  might  be  held  together  and  protected  against 


REORGANIZATIONS  AND  RECEIVERSHIPS  363 

the  seizure  of  certain  parts  of  the  system  hy  other  creditors 
which  might  destroy  the  vahie  of  the  property  as  a  whole. 
Usually  the  corporation  appeared  before  tlic  couri  in  oppo- 
sition to  the  motion,  so  that,  if  receivers  were  appointed 
at  all,  the  court  acted  upon  information  broucfht  to  its 
knowledge  after  a  severe  legal  struggle.  The  idea  that  the 
corporation  itself  could  ask  for  an  appointment  of  a  receiver 
for  its  own  property  originated  with  the  late  Jay  Gould, 
whose  contention  in  the  Wabash  cases  in  this  respect  was 
afterwards  affirmed  by  the  Supreme  Court  of  the  United 
States,  which  held  that  a  company  could  itself  ask  for  the 
protection  of  the  court  if  such  was  for  the  best  interest  of 
all  concerned.  Under  this  doctrine  few  of  our  large  rail- 
way systems  are  now  placed  in  any  but  "friendly"  hands. 
In  such  cases  the  matter  is  all  planned  out  beforehand  and 
the  men  chosen.  Any  creditor  of  the  company,  friendly 
to  the  administration,  may  allege  that  the  corporation  owes 
him  money  that  it  cannot  pay,  and  as  every  going  concern 
has  plenty  of  creditors  in  the  ordinary  course  of  business, 
such  a  convenient  creditor  is  usually  not  hard  to  find.  To 
this  complaint,  usually  prepared  in  secret,  some  one  of  the 
company's  officers  arranges  a  reply  confessing  the  truth  of 
the  charge.  All  parties  concerned,  each  with  the  respective 
documents,  and  without  notice  to  the  other  creditors  or  to 
the  public,  apply  to  the  judge,  perhaps  at  night,  who  forth- 
with grants  the  application  and  appoints  the  receivers  al- 
ready arranged  for.  That  this  procedure  opens  the  door 
to  the  possibility  of  great  abuse  of  corporate  interests  needs 
no  argument.  That  on  the  whole  the  plan  has  worked  fair- 
ly well  is  owing  to  the  high  character  of  our  judiciary  and 
also  of  the  officers  in  charge  of  our  great  corporations.  Yet 
it  is  not  reassuring  to  holders  of  stocks,  bonds,  or  floating 
debt  to  know  that  a  conspiracy  between  any  small  creditor 
and  any  one  of  the  principal  officers  of  a  corporation  may 
throw  the  control  of  the  whole  property  of  the  company  into 
the  hands  of  the  court.     Unquestionably,  the  appointment 


364  THOMAS  L.  GREENS 

of  former  officers  of  the  company  as  receivers  leads  to  the 
charge  at  times  that  those  who  had  wrecked  the  company 
are  still  left  in  power.  Moreover,  the  door  is  open  to 
abuses,  such  as  the  difficulty  easily  thrown  in  the  way  of  a 
thorough  investigation  into  the  company's  condition,  which 
it  may  be  the  wish  of  the  old  managers  to  thwart,  but  which 
may  be  necessary  before  an  equitable  plan  of  reorganiza- 
tion can  be  evolved.  Yet  the  affairs  of  our  large  corpora- 
tions have  become  so  complicated  that  only  those  long  fa- 
miliar with  them  are  capable  of  administering  them  without 
losses  both  to  owners  of  the  road  and  to  shippers.  This 
business  fact  has  so  far  controlled  the  action  of  the  courts 
in  the  appointing  of  old  officers  of  the  insolvent  corporation 
as  receivers,  though  usually  other  men  not  previously  con- 
nected with  the  company,  but  representing  important  inter- 
ests as  well  as  the  sections  through  which  the  road  runs,  are 
chosen  to  serve  with  them.  Laws  have  been  introduced  in 
various  states  to  check  the  abuses  to  which  the  methods  of 
receiverships  have  given  rise,  but  while  these  statutes  have 
done  good  as  to  certain  matters  of  detail,  the  commercial 
facts  of  which  we  have  spoken  have  been  strong  enough 
thus  far  to  prevent  any  material  modification  of  the  policy. 

The  immediate  cause  of  a  railway  receivership  is  usually 
the  floating  debt.  Strictly  speaking,  the  expression  *' float- 
ing debt"  means  the  money  borrowed  by  a  company  on  col- 
lateral and  made  payable  on  demand  or  within  a  short  time. 
The  term,  however,  is  sometimes  used  to  cover  other  debts 
of  the  corporation,  such  as  for  supplies  which  have  been 
bought  but  not  paid  for.  A  railway  which  is  fairly  prosper- 
ous can  arrange  to  pay  its  bond  interest  in  a  period  of  de- 
pression without  showing  signs  of  distress.  Every  large 
business  concern,  such  as  a  manufactory,  must  arrange  for  a 
depreciation  of  plant  and  machinery  before  setting  aside 
earnings  applicable  to  interest  or  dividends.  The  reason 
for  this  is  that,  were  a  contrary  course  to  be  pursued,  the 
stockholders  or  bondholders  would  very  shortly  find  them- 


REORGANIZATIONS  AND  RECEIVERSHIPS  365 

selvt's  ill  possession  of  a  woi-thloss  property.  In  factcjriesthc 
ex})('('ted  losses  from  depreciation  are  usually  arranged  for 
by  settins^  aside  a  certain  sum  of  money  from  the  earnings 
yearly,  but  the  practice  of  railways  is  different.  It  is  the 
custom  with  them  to  renew  or  replace  roadbed,  track,  and 
equipment  from  year  to  year  as  fast  as  these  deteriorate  or 
become  woni  out,  charging  the  cost  directly  to  working  ex- 
penses. By  these  means  the  whole  plant  is  kept  up  to  its 
standard  at  the  expense  of  the  earnings,  the  effect  being  the 
same  as  though  specific  sums  had  been  set  aside  from  in- 
come each  year.  This  method  of  arranging  for  deprecia- 
tion allows  the  railways  to  vary  the  amount  of  replacement 
from  year  to  year  according  as  the  seasons  are  prosperous  or 
the  reverse.  In  a  good  year  more  may  be  spent  upon  the 
roadbed  and  the  track  and  for  the  purchase  of  new  equip- 
ment to  replace  the  old  at  the  cost  of  working  expenses, 
than  perhaps  was  proportionately  required.  Then,  in  poor 
years,  not  so  much  of  this  sort  of  work  may  be  done,  allow- 
ing a  larger  proportion  of  gross  income  to  be  payable  to 
bondholders  and  stockholders.  This  saving  in  the  working 
expenses  by  a  stoppage  of  repairs  to  the  plant  is  usually  the 
first  resort  of  the  railway  manager  when  pressed  for  im- 
mediate money  to  pay  bond  interest.  Then  there  are  al- 
ways demands  for  new  capital  for  improvements  necessary 
to  be  made  by  every  railway  as  its  traffic  increases.  Ordina- 
rily bonds  are  sold  to  meet  these  capital  charges.  If,  be- 
cause of  a  lack  of  confidence  on  the  part  of  the  investing 
public,  or  a  lack  of  credit  as  regards  this  particular  com- 
pany, such  bonds  cannot  be  sold,  except  perhaps  at  a  great 
sacrifice,  then  the  management  proceed  to  borrow  the  nec- 
essary^ money  for  these  capital  improvements  and  perhaps 
for  the  then  due  bond  interest.  Usually  the  com])any  must 
hypothecate  with  the  bankers  from  whom  the  money  is 
borrowed,  bonds  either  of  the  company  itself  or  such  as  are 
held  in  its  treasuiy  and  controlling  subsidiary  lines  impor- 
tant to  tlie  integrity  of  the  system,  so  that  the  banker's  loan 


366  THOMAS  L.  GREENE 

may  be  fully  secured.    If  matters  go  from  bad  to  worse,  if 
it  appear  to  the  lender  that  the  situation  of  the  company  is 
becoming  more  and  more  critical,  so  that  he  is  beginning 
to  doubt  the  real  value  of  the  collaterals  held  by  him,  he 
then  calls  for  his  money,  if  it  is  loaned  on  demand,  or  gives 
notice  that  he  will  ask  for  it  when  the  same  shortly  matures. 
If  the  company  cannot  arrange  to  borrow  the  amount  from 
some  one  else,  and  if  it  is  confronted  with  the  sale  of  all  its 
securities  at  bankrupt  prices,  the  managers  may  resolve  to 
confess  their  own  insolvency  before  a  public  confession  is 
made  by  the  sale  of  the  securities  held  by  the  banker.    Per- 
haps, just  at  this  moment,  a  large  amount  of  interest  is  due 
to  bondholders.    In  such  a  case  the  railway  managers  may 
choose  to  default  on  the  bond  interest  and  take  the  money 
for  payment  to  the  floating-debt  holders,  in  order  to  save 
for  the  company  the  collateral  which  the  bankers  may  hold, 
and  which  may  be  essential  to  the  control  of  parts  of  the 
system,  but  which  would  very  likely  go  for  a  song  if  pressed 
for  immediate  sale.    Wliile,  therefore,  floating  debts  do  not 
differ  from  other  obligations  of  the  company  except  in  form, 
they  have  come  to  be  recognized  in  Wall  Street  as  a  source 
of  great  danger  in  any  period  of  business  depression  or  lack 
of  credit.     If  this  money  borrowed  on  demand  or  on  short 
notice  can  be  funded  into  bonds  having  years  to  run,  the 
company  cannot  suffer  through  a  demand  upon  it  for  the 
principal,  but  it  is  safe  so  long  as  the  interest  is  promptly 
paid.     This  reasoning  has  led  railway  companies  at  times 
to  adopt  the  plan  of  selling  long-time  bonds  in  order  to  pay 
off  the  floating  debt,  even  though  the  price  received  should 
be  far  below  par.    But  such  a  course  compels  the  company 
to  pay  a  very  high  rate  of  interest  during  the  whole  life  of 
the  bonds  and  is  considered  such  bad  financiering  that  such 
sales  are  taken  in  Wall  Street  as  an  acknowledgment  that 
the  company  is  hard  pressed — with  results  to  the  credit  of 
the  corporation  almost  as  bad  as  though  the  distress  had 
been  openly  acknowledged.     Under  these  circimistances, 


REORGANIZATIONS  AND  RECEIVERSHIPS  367 

''friendly"  rcccivors  arc  often  asked  for  so  that  interest 
may  ])e  withheld  from  the  ])ondholders  and  used  to  take  up 
the  obligations  of  the  com])any  iniiucdiately  pressing,  par- 
ticularly in  cases  where  a  failure  to  meet  those  obligations 
would  entail  severe  losses  upon  the  system  for  all  time. 

The  court  appointing  receivers  thus  asked  for  usually 
stipulates  that  debts  incurred  in  the  operation  of  a  road  for 
several  months  shall  be  paid  by  the  receivers.  At  first 
blush  it  would  appear  that  such  an  order  entails  hardship 
upon  the  creditoi-s  of  the  company,  yet  upon  examination 
it  will  be  found  to  be  equitable.  Transportation  is  con- 
ducted as  a  cash  business.  Travellers  and  shippers  are  re- 
quired to  pay  their  money  down  before  taking  their  journey 
or  receiving  their  property.  Since  a  railway  must  be  run 
in  the  interest  of  the  general  public,  and  since  this  involves 
the  theory  that  its  working  expenses  must  be  paid,  it  is  clear 
that  the  expenses  of  today  are  properly  chargeable  to  the 
gross  receipts  of  today  paid  in  cash  by  the  patrons  of  the 
road.  But,  as  we  have  seen,  in  periods  of  distress,  the  man- 
agers in  order  to  postpone  a  confession  of  bankruptcy  in  the 
hopes  that  the  temporary  trouble  may  be  tided  over,  begin 
to  put  off  payments  for  wages  or  for  coal,  rails,  ties,  and  sup- 
plies of  all  descriptions  which  they  may  continue  to  buy, 
because  necessary  for  the  continued  operation  of  the  trains. 
In  this  way,  at  the  date  of  appointment  of  receivers,  every 
bankrupt  road  has  large  arrears  of  wages  and  accounts  to 
be  made  up.  As  these  current  obligations  are  really  charge- 
able to  the  receipts  of  the  several  months  past,  and  as  these 
receipts  have  been  taken  to  pay  bond  interest  or  for  other 
purposes  in  the  interest  of  the  bondholders,  it  is  proper  that 
the  prior  claims  for  current  expenses  should  be  made  up 
from  the  first  receipts  of  the  road  under  the  receivership. 
If  there  is  any  complaint  to  be  made  on  the  part  of  the  bond- 
holders, it  is  that  tiie  knowledge  of  these  facts  has  not  been 
brought  to  their  attention;  but  usually  in  such  a  matter  the 
managers  of  the  road  act  in  good  faith,  in  the  hopes  that 


368  THOMAS  L.  GREENE 

better  times  may  enable  them  to  pay  up  the  back  debts  and 
save  the  indirect  losses  to  the  bondholders,  which  a  public 
confession  of  the  real  situation  would  at  that  time  have 
caused. 

The  heavy  expenses  confronting  the  receivers  at  the 
time  of  their  appointment  are  met  partly  from  defaulted 
bond  interest  and  perhaps  from  receivers'  certificates.  At 
first  these  certificates,  generally  made  a  first  lien  on  the 
property,  were  authorized  very  sparingly  by  the  courts  and 
only  in  cases  shown  beyond  dispute  to  be  necessary.  Grad- 
ually such  issues  were  extended,  until  the  present  practice 
is  for  authorization  of  certificates  for  any  purpose  w^hich  the 
court  may  be  led  to  believe  is  for  the  ultimate  benefit  of  the 
road.  In  this  way  another  mortgage  is  put  ahead  of  the 
regular  mortgage  whose  bonds,  held  by  the  public,  have 
been  supposed  and  declared  to  be  a  prior  lien  upon  the  road. 
The  force  of  circumstances  often  thus  impairs  the  rights  of 
existing  mortgages  though  these  be  drawn  in  strong  legal 
language.  The  right  to.  issue  receivers'  certificates  has 
been,  and  may  be,  greatly  abused.  In  one  case  the  expense 
of  operating  greatly  exceeded  the  receipts.  The  property 
and  franchises  should  have  been  sold  at  once  so  that  the 
first-mortgage  bondholders  might  at  least  have  received  the 
value  of  the  rails  and  equipment;  but  the  court  allowed  the 
receivers  to  go  on  running  the  road  until  the  certificates  is- 
sued to  make  up  the  losses  amounted  to  more  than  the  value 
of  the  property,  the  bondholders  not  getting  a  cent.  Re- 
ceivers' certificates  should  be  authorized  only  when  a  care- 
ful judgment  tempered  by  conservatism  justifies  their  issue. 
As  just  said,  the  directors,  at  the  first  appearance  of  a  de- 
cline in  profits,  economize  in  depreciation  expenses,  hoping 
for  better  times.  If  the  decline  continues  and  a  receivership 
ensues,  the  passing  of  the  property  into  the  hands  of  the 
court  is  an  acknowledgment  of  facts  regarding  impairment 
of  income  which  are  true  though  not  before  generally 
known.    Hence  the  issue  of  receivers'  certificates  commer- 


REORGANIZATIONS  AND  RECEIVERSHIPS  369 

cially  represents  the  impainnent  of  income  just  referred  to, 
])nt  which  at  the  time  was  not  enforced  apjainst  the  bond- 
holders. Railway  niort,e:a,o:es  are  not  sacred  because  of  the 
strong  legal  terms  in  which  they  are  drawn,  but  are  depend- 
ent upon  success  in  the  business  of  transportation,  differ- 
ing in  this  respect  from  real-estate  mortgages  which  rely 
more  upon  the  prosperity  of  the  whole  comnumity.  The 
legal  doctrine  of  certificates  is  in  a  state  of  evolution,  with 
a  tendency  to  approximate  its  working  to  the  business  cir- 
cumstances. Our  practice  of  railway  receiverships  is  thus 
a  development  of  our  own  circumstances  and  a  sort  of  com- 
promise between  the  too  strong  language  of  our  mortgages 
and  the  actual  conditions  of  the  business  of  transportation. 

A  receiver  piay  decline  to  pay  the  rentals  due  to  leased 
lines  or  the  interest  owing  on  guaranteed  bonds  if  these 
lines  are  at  the  time  of  the  receivership  unprofitable,  no 
matter  how  necessary  to  the  parent  company  these  branches 
may  once  have  been.  But  the  old  contracts  are  still  legally 
in  force  against  the  company,  and  can  be  thrown  off  only  by 
a  sale  of  the  franchise  and  property  to  a  ne^v  corporation. 
Such  a  sale  sometimes  would  involve  a  forfeiture  of  valu- 
able charter  rights  besides  a  long  legal  struggle;  and  in  such 
reorganizations  committees  usually  try  to  formulate  some 
plan  which  shall  bring  the  fixed  charges  below^  the  minimum 
l^rofits  by  allotting  the  necessary  losses  among  all  classes  of 
securities  in  2:»roportion  to  their  respective  values  to  the 
system  as  a  whole — a  process  which  does  not  regi\rd  the 
liens  of  the  mortgages  so  much  as  the  worth  of  the  lines 
they  cover.  But  with  plans  of  reorganization,  the  receiver 
properly  should  have  nothing  to  do. 

The  legal  doctrine  and  the  practice  regarding  receiver- 
ships and  receivership  problems  have,  in  the  United  States, 
been  developed  thus  far  largely  in  the  affairs  of  railways. 
Railways  so  clearly  have  public  duties  to  perfonn  that  it 
was  inevitable  that  questions  regarding  their  continued  op- 
eration should  require  settlement.     This  point  once  settled, 

B—ll—Zi 


370  THOMAS  L.  GREENE 

matters  of  detail  about  the  proper  working  ^YOuld  naturally 
come  up  for  adjustment  in  the  order  of  their  commercial 
evolution. 

For  these  reasons  we  find  the  custom  regarding  railway 
receiverships  much  in  advance  of  those  concerning  other 
corporations.  But  though  these  latter  lag  behind,  there 
are  not  wanting  signs  that  some  of  the  problems  of  this 
character  which  we  are  trying  to  solve  in  transportation,  are 
in  the  future  to  demand  consideration  in  manufacturing. 
When  factories  were  numerous  but  small  and  easily  man- 
aged by  an  individual  or  by  a  firm  composed  of  but  few 
persons,  it  was  not  a  matter  of  great  public  moment  wheth- 
er one  or  two  firms  failed.  The  demand  could  be  easily 
supplied  by  the  manufacturers  still  in  business  and  per- 
haps the  factory  itself,  belonging  to  the  insolvent  partners, 
would  be  re-opened  and  run  by  another  firm.  The  case  is 
altered  already,  if  we  have  in  mind  the  large  corporations 
formed  to  do  certain  manufacturing  on  an  extensive  scale, 
and  the  point  is  likely  to  demand  more  attention  in  the 
future,  when,  in  the  probable  evolution  of  things,  the  great- 
er part  of  our  manufactured  output  may  be  produced  by 
a  comparatively  few  companies  having  large  capital,  ex- 
tensive plants,  and  the  best  of  appliances — for  to  such  a 
state  of  production  are  we  slowly  tending. 

Already  cases  of  the  insolvency  of  large  manufacturing 
companies  have  been  before  the  courts.  In  appointing  re- 
ceivers, it  is  now  customary  in  such  instances  to  allow  these 
officers  of  the  courts  to  continue  the  business.  Like  rail- 
ways, these  large  corporations  cannot  very  well  stop  work- 
ing. Not  only  are  large  bodies  of  laboring  men  dependent 
for  bread  upon  this  continued  operation,  but  concerns 
throughout  the  coimtry  would  be  embarrassed  if  their 
orders,  perhaps  half  executed,  should  not  be  completed  at 
the  appointed  time. 

Under  our  assumptions,  it  might  not  be  possible  for  the 
customers  of  the  corporation  to  obtain  the  required  articles 


REORGANIZATIONS  AND  RECEIVERSHIPS  371 

from  any  other  source  of  supply,  and  certainly  not  in  tinic 
to  go  ahead  with  their  own  plans — plans  which  it  not  car- 
ried out  might  cause  financial  embarrassment  to  them  also 
and  to  others.  In  short,  the  larger  the  com])any,  the  more 
complete  the  producing  organization,  the  more  important 
to  the  community  is  its  continued  operation.  We  have 
heard  complaints  from  solvent  com])anies  or  firms  that  the 
competition  of  factories  in  the  hands  of  receivers  was  un- 
fair to  them,  exactly  as  in  the  case  of  railways;  but  the 
growing  interdependence  of  trade  and  commerce  leaves  no 
other  alternative. 

This  being  so,  the  discussion  just  had  on  the  commer- 
cial facts  underlying  railway  receiverships  has  a  bearing 
upon  the  immediate  and  future  problems  of  manufactur- 
ing or  trading  corporations.  This  is  all  the  more  true  be- 
cause these  latter  are  now  issuing  mortgages  after  the  man- 
ner of  transportation  companies.  In  the  present  customs 
about  railway  receiverships  and  their  rapid  evolution  under 
the  stress  of  actual  conditions,  and  in  the  philosophy  which 
seems  to  underlie  those  customs,  we  may  catch  glimpses 
of  the  probable  experience  awaiting  the  community  if  large 
business  corporations  are  to  do  the  most  of  our  manufac- 
turing, and  if  the  managers  of  those  companies  should  re- 
peat the  financial  blunders  or  frauds  which  appear  in  our 
past  railway  history,  or  if  commercial  disaster  should  com- 
pel a  readjustment  of  capital. 


DISSOLUTION  OF  A  PRIVATE  CORPORATION.* 

BY  WILLIAM  ALLEN  WOOD. 

There  are  five  ways  in  which  a  corporation  may  cease 
to  exist.  If  it  is  created  to  exist  for  a  given  term  of  years, 
named  in  the  charter,  it  dies  at  the  end  of  that  time.  Sec- 
ond, the  charter  may  be  repealed  by  the  legislature  of  the 
state  which  granted  it,  if  the  statute  contains  a  clause, 
which  most  statutes  do,  providing  that  it  may  be  repealed 
at  any  time.  Third,  the  charter  may  be  surrendered  vol- 
untarily by  the  corporation,  with  the  consent  of  the  state. 
Fourth,  the  charter  may  be  forfeited  for  non-user  or  for 
some  wrongful  act  which  has  been  done  by  the  corporation 
and  for  which  it  is  called  to  account  by  the  attorney-gen- 
eral of  the  state.  A  court  decides  whether  there  is  a  for- 
feiture. Fifth,  when  all  the  members  of  the  corporation 
die,  so  there  are  no  stockholders  left,  it  is  generally  consid- 
ered that  the  corporation  ceases  to  exist.  This  is  the  law, 
notwithstanding  the  fact  that  the  corporation  is  distinct 
from  its  members.  The  last  form  of  extinction  is  almost 
inconceivable  in  a  moneyed  corporation  with  transferable 
shares  since,  when  a  stockholder  dies,  his  shares  pass  to  his 
heirs.  There  is,  of  course,  no  such  thing  as  a  resignation 
from  a  moneyed  corporation,  and  no  way  for  a  stockholder 
to  cease  to  be  a  stockholder  except  through  a  transfer  of 
his  stock  or  the  death  of  the  corporation.  Whether  a  con- 
solidation of  two  companies  effects  a  dissolution  depends 
upon  the  tenns  of  the  statute  under  which  the  consolidation 
is  effected.  One  corporation  may  absorb  another  by  pur- 
chasing, under  statutory  authority,  all  the  shares,  fran- 


*  From  Modern  Business  Corporations,  by  William  Allen  Wood  and  Louis 
jB.  Ewbank,  Indianapolis.     The  Bobbs-Merrill  Co. 

37^ 


DISSOLUTION  OF  PRIVATE  CORPORATION  373 

chiscs,  and  proix'rties  of  anotlior  corporation,  and  tliis  may 
work  a  practical  dissolution  of  the  soiling  coi']^orati(>ii. 

A  corporation  is  not  dissolved  by  a  sale  and  assignment 
of  all  its  corporate  propei-ty;  by  discontimiin--  business;  by 
failure  to  elect  officers  and  directors;  by  the  accpiisition  hy 
one  person  of  all  the  stock;  or  by  insolvency. 

]\lany  corporations  are  not  successful,  and  fail  in  their 
purpose.  Having  neither  sufficient  property  or  debts  to 
make  a  formal  dissolution  necessary,  they  are  simply  aban- 
doned by  their  officer  and  stockholders.  Unless  the  char- 
ter is  caused  to  l)e  f<ufeited  by  the  state,  the  corporation  is 
not  dissolved  until  the  time  limit  expires.  Failure  to  pay 
taxes  due  to  the  state  is  cause  for  forfeiture  of  charter.  An 
inactive  corporation  may  be  revived  at  any  time  under  such 
a  running  charter  by  paying  delinquent  taxes  and  other 
debts.  Sometimes  persons  intending  to  carry  on  the  same 
line  of  business  as  that  authorized  under  a  charter  owned 
by  an  inactive  corporation  will  buy  the  stock  of  the  inactive 
corporation  at  a  nominal  price,  which  is  less,  usually,  than 
it  would  take  to  buy  a  new  charter,  and  will  conduct  their 
business  under  that  charter's  authority.  Care  nuist  he  ex- 
ercised that  they  are  not  thereby  acquiring  liabilities  of 
which  they  had  no  knowledge.  When  a  corporation  be- 
comes insolvent,  proper  legal  proceedings  may  bring  about 
the  appointment  of  a  receiver,  who  will  settle  the  affairs  of 
the  corporation  and  usually  dissolve  it. 

Voluntary  dissolution  may  be  brought  about  by  vote  of  a 
given  fraction  (usually  two-thirds)  or  all  of  the  stockhold- 
ers of  a  corporation,  accoi-ding  to  statutory  provisions.  In 
the  absence  of  statutory  provisions,  a  dissolution  may  usu- 
ally be  brought  about  by  consent  of  a  majority  of  the  stock- 
holders and  a  decree  of  a  court  of  competent  jurisdiction; 
or  it  may  cei-tainly  be  brought  about  by  consent  of  all  the 
stockholders.  ]\[ost  states  give  the  procedure  for  liringing 
about  voluntaiy  dissoluti<^n,  and  this  procedure  should  be 
carefullv  followed  so  that  all  the  stockholdei-s  and  creditors 


374 


WILLIAM  ALLEN  WOOD 


may  be  bound  by  the  action  taken.  The  usual  process  is  for 
the  directors  to  call  a  stockholders'  meeting,  advertise  it 
and  notify  the  stockholders,  and  give  evidence  to  the  state 
that  proper  consent  has  been  given  to  the  dissolution.  The 
directors  are  then  given  the  power  to  pay  creditors  and  to 
divide  the  remaining  property  among  the  stockholders.  It 
has  been  held  that  a  dissolution  of  a  corporation  does  not 
destroy  the  obligation  of  a  corporation's  contracts,  as  the 
equitable  rights  of  creditors  survive  the  act  of  dissolution 
and  attach  to  the  assets  and  property  of  the  corporation  in 
the  hands  of  its  liquidators. 


DOCUMENTS  ILLUSTRATING  BUSINESS 
ORGANIZATION. 

I.     ARTICLES  OF  COPARTNERSHIP.* 
(A)— SIMPLE  ARTICLES  OF  COPARTNERSHIP. 

Edward  T.  Craven  and  Milton  Noble,  both  of  the  City  of 
Rochester,  New  York,  hereby  mutually  agree  to  become 
partners  under  the  firm  name  of  "Craven  &  Noble"  to  con- 
duct the  trade  and  business  of  sign-painting  in  the  said  city 
for  the  period  of  two  years  from  date. 

The  said  Craven  invests  his  stock  of  paints,  bnishes  and 
other  material,  estimated  to  be  worth  two  hundred  dollars, 
and  tx.e  said  Noble  invests  two  hundred  dollars  in  cash. 

Both  partners  shall  give  their  entire  time  and  shall  share 
losses  and  gains  equally. 

All  amounts  earned  or  received  by  either  partner  for 
work,  materials  or  anything  pertaining  to  the  business, 
shall  be  deposited  in  the  Guardian  Trust  Company  of  Roch- 
ester in  the  name  of  both  partners,  and  shall  be  checked 
out  as  needed  for  expenses  and  supplies,  by  the  signatures  of 
both  partners,  and  an  equal  amount  shall  be  drawn  each 
Monday  morning  for  each  partner  for  personal  expenses, 
l)ut  a  balance  of  two  hundred  dollars  shall  always  be  kept 
and  held. 

"When  the  firm  shall  l)e  dissolved  the  material  on  hand 
shall  be  divided  equally  and  all  debts  shall  ])e  ])aid  from  the 
money  in  bank,  after  which  the  balance  shall  be  divided 
equally  between  the  partners. 


*  From    Conyngton"s    Manual    of    Partnership    Relations.      Ronald    Press, 
New   York. 

375 


376    BUSINESS  ORGANIZATION  DOCUMENTS 

Witness  our  hands  and  seals  this  12th  day  of  October, 

1905. 

Edward  T.  Craven.  (L.S.) 
Milton  Noble.  (L.S.) 

Attest, 

Mark  Gorham. 

(B)— ARTICLES  FOR  MANUFACTURING  BUSINESS. 

THESE  ARTICLES  OF  COPARTNERSHIP  made 
and  entered  into  as  of  the  eighth  day  of  April,  nineteen 
hundred  and  five,  by  and  between  Henry  Gardes,  of  the 
City,  County  and  State  of  New  York,  party  of  the  first  part, 
Harvey  Wilson,  of  the  same  place,  party  of  the  second  part, 
and  James  Haskins,  of  the  same  place,  party  of  the  third 
part,  WITNESS: 

I.  The  parties  hereto  for  and  in  consideration  oi  the 
mutual  provisions  and  agreements  hereinafter  contained, 
and  the  sum  of  one  dollar  each  to  the  other  in  hand  paid, 
the  receipt  w^hereof  is  hereby  acknowledged,  have  agreed  to 
and  do  by  these  presents  become  copartners  together  in  the 
business  of  manufacturing  and  selling  disinfectants  and 
disinfecting  apparatus,  and  in  buying,  selling,  renting  and 
vending  all  sorts  of  goods,  wares  and  merchandise  to  said 
business  belonging  or  pertaining,  and  to  conduct  said  busi- 
ness in  the  City  of  New  York,  and  in  such  other  place  or 
places  as  may  be  expedient  and  beneficial. 

II.  The  firm  name  and  style  of  said  business  shall  be 
the  WILSON  MANUFACTURING  COMPANY.  Said 
copartnership  shall  commence  on  the  day  of  the  date  hereof 
and  shall  continue  for  ten  years  thereafter. 

III.  Each  party  hereto,  hereby  contributes  to  the  said 
business  all  his  right,  title  and  interest  in  and  to  the  assets 
of  the  former  firm  known  as  and  by  the  same  name,  which 
was  organized  under  Articles  of  Agreement  bearing  date 
the  twenty-third  day  of  November,  eighteen  hundred  and 
ninety-six",  by  and  between  the  parties  hereto,  together  with 
one  Henry  Caldwell  and  which  was  this  day  dissolved  by 


ARTICLES  OF  COPARTNERSHIP  377 

niiitiial  cniisciit,  and  tlio  intorcst  of  said  Caldwell  assii^nicd 
to  tlu'  ])arti('s  hereto,  it  beiiii^  understood  and  agreed  that 
tlie  eontribntion  of  each  is  in  the  sanu^  ])i-o|)ortion  as  tho 
intei'est  of  each  a])])ears  n])on  the  books  of  the  said  dissolved 
firm,  saving  that  tlie  prolits  thereof  shall  be  eai'ried  to  the 
credit  of  each  from  the  inception  of  such  former  partnership 
in  accordance  \vith  the  ])rovisions  of  Paragraph  V  below. 
For  the  purpose  of  ascertaining  such  res})eetive  interests,  an 
account  shall  be  stated  between  the  parties  hereto  in  re- 
s]iect  to  said  dissolved  firm,  and  any  amount  due  from 
Henry  Caldwell,  the  retiring  partner,  as  well  as  any  amount 
paid  to  him  by  said  firm  to  induce  his  retirement,  shall  be 
charged  to  the  profit  and  loss  account. 

IV.  The  said  parties  of  the  second  and  third  parts  each 
hereby  agrees  to  contnbute  all  his  business  skill  and  ex- 
]ierience,  and  each  shall  give  his  whole  time  and  attention 
exclusively  to  the  affairs  of  said  business  and  shall  not  be 
engaged,  employed  or  interested  in  any  other  business 
whatever. 

The  party  of  the  second  part  is  to  more  especially  at- 
tend to  the  manufacturing  department  and  office  work,  and 
the  party  of  the  third  part  is  to  more  especially  attend  to 
the  sales  department,  but  in  general  one  of  said  parties  of 
the  second  and  third  parts  shall  at  all  times  attend  to  such 
duties  as  shall  best  serve  the  interests  of  said  business. 

V.  Tlie  profits  and  losses  of  said  business  shall  be 
borne  and  divided  between  the  parties  hereto  as  follows: 
Tlie  ]\arty  of  the  second  part,  forty-two  and  one-half  per 
cent  thereof;  the  party  of  the  third  part,  forty-two  and  one- 
half  per  cent  thereof;  the  party  of  the  first  part,  fifteen  per 
cent  thereof. 

VI.  Anything  to  the  contrary  hereinbefore  notwith- 
standing, said  pai-ty  of  the  first  part  shall  have  the  privilege 
on  the  first  day  of  January,  nineteen  hundred  and  six:  (1) 
To  withdraw  from  said  business;  (2)  to  continue  the  same 
upon  the  terms  hereinbefore  provided;  (3)  to  contribute 
the  further  sum  of  twenty-five  hundred  dollars  t*^  said  busi- 
ness (for  which  he  shall  thereupon  be  credited  on  the  books 
of  said  firm).  Upon  such  additional  contribution  of  twenty- 
five  hundred  dollars,  the  said  party  of  the  first  part  shall  be 
allowed  interest  at  the  rate  of  five  per  cent  per  annum,  to 
be  chai'ged  as  an  expense  to  the  said  business. 


378    BUSINESS  ORGANIZATION  DOCUMENTS 

Said  party  of  the  first  part  shall  notify  in  writing  the 
parties  hereto  on  or  before  the  first  day  of  December,  1905, 
of  his  choice  of  the  above  three  options,  and  in  the  eA^ent  of 
his  election  to  contribute  the  further  sum  of  twenty-five 
hundred  dollars,  he  thereupon  shall  also  contribute  his  skill 
and  experience  and  devote  all  his  time  and  attention  exclu- 
sively to  the  said  business  and  shall  not  be  engaged,  em- 
ployed or  interested  in  any  other  business  whatsoever,  and 
the  branch  thereof  to  which  he  shall  more  especially  attend 
shall  be  the  selling  of  goods,  the  management  of  said  office 
and  the  financial  work  of  the  said  firm. 

In  the  event  of  his  election  to  so  contribute  said  sum 
of  twenty-five  hundred  dollars  upon  the  terms  hereinbefore 
stated,  then  instead  of  the  profits  and  losses  being  borne  and 
divided  as  provided  in  the  previous  paragraph,  the  same, 
shall,  from  and  after  the  first  day  of  January,  1906,  be  borne 
and  divided  between  the  parties  hereto,  share  and  share 
alike. 

In  the  event  of  his  election  to  withdraw  from  said  firm, 
an  accounting  shall  be  had  on  Janusury  first,  nineteen  hun- 
dred and  six,  between  the  parties  hereto,  and  he  shall  there- 
upon be  paid  in  full  the  amount  which  shall  appear  due  to 
him  upon  such  accounting,  but  the  copartnership  shall  be 
continued  between  the  other  parties  hereto  upon  the  same 
terms  as  in  this  contract  provided,  saving  that  the  liability 
and  benefit  of  the  purchase  of  the  interest  of  said  party  of 
the  first  part  shall  be  divided  equally  between  said  parties 
of  the  second  and  third  parts. 

VII.  Each  of  the  parties  of  the  second  and  third  parts 
hereto  shall  be  entitled  to  draw  weekly  during  the  contin- 
uance of  this  copartnership,  as  follows:  Party  of  the  sec- 
ond part,  thirty-five  dollars  per  week;  party  of  the  third 
part,  twenty-five  dollars  per  week;  to  be  charged  to  the  per- 
sonal accounts  of  the  parties  drawing  the  same. 

In  the  event  of  the  marriage  of  the  party  of  the  third 
part,  he  shall  be  entitled  thereafter  to  draw  weekly  an  ad- 
ditional sum  of  ten  dollars,  to  be  charged  to  his  personal 
account. 

Tlie  party  of  the  first  part  in  the  event  of  his  further  con- 
tribution of  the  further  sum  of  twenty-five  hundred  dollars 
upon  the  first  day  of  January,  nineteen  hundred  and  six, 
upon  the  terms  above  specified,  shall  be  entitled  on  and  after 


ARTICLES  OF  COPARTNERSHIP  379 

that  day  to  draw  weekly  duiiiiL!,-  tlic  coiiliimancc  of  this 
copartnership  the  sum  of  thirty-live  dollars  per  week,  to 
be  charged  to  his  personal  account. 

It  is  understood  and  agreed  that  no  further  sum  or  sums 
shall  be  drawn  by  either  of  the  ])arties  hereto  without  the 
Avritten  consent  ot*  the  others  having  first  been  obtained,  ex- 
cepting as  provided  in  Paragraph  XI  herein. 

VIII.  There  shall  be  kept  and  had  at  the  place  of  busi- 
ness of  the  said  copartners  at  all  times  during  the  continu- 
ance of  this  copartnership  true,  just  and  accurate  books  of 
account  of  said  firm  wherein  shall  be  entered  and  set  down 
trulv  and  correctly  and  properly,  as  well  all  money  by  said 
copartners  or  either  of  them  received,  paid,  laid  out  and 
expended  in  and  about  their  said  business,  as  also  all  mer- 
chandise by  them  or  either  of  them  bought  or  sold  by  rea- 
son or  on  account  of  said  business,  and  all  other  matters  and 
things  whatsoever  to  the  said  business  and  the  manage- 
ment therof  in  any  wise  belonging,  which  said  books  shall 
at  all  reasonable  times  be  open  to  the  use  and  inspection  of 
either  of  said  copartners,  so  that  either  of  them  may  have 
free  access  thereto  without  any  interruption  or  hindrance 
of  the  other,  and  none  of  said  books  nor  any  papers  or  writ- 
ing whatsoever  belonging  to  said  firm,  shall  be  removed 
from  the  place  of  business. 

IX.  The  said  parties  hereby  further  mutually  agree  to 
and  with  each  other  that  during  the  continuance  of  the  said 
copartnership  neither  of  them  shall  nor  will  make,  accept 
nor  endorse  any  note,  bill,  cheque,  draft  or  other  commercial 
paper  in  his  own  or  in  said  firm  name,  for  the  accommoda- 
tion or  1)enefit  of  any  person  or  pei^sons,  whomsoever,  or  in 
said  name  or  names  enter  into  any  l)ond,  undertaking,  guar- 
anty or  otherwise  incur  lia])ility  on  his  own  behalf  or  on 
behalf  of  said  firm,  for  the  accommodation  or  benefit  of  any 
person  or  persons  whomsoever,  without  the  consent  in  wiit- 
ing  of  the  other  parties  to  this  agreement. 

X.  All  notes,  cheques,  or  other  commercial  paper  shall, 
during  the  continuance  of  this  agreement,  require  the  sig- 
nature of  the  party  of  the  second  ])art  and  at  least  one  other 
menil)er  of  said  copartnership,  and  in  case  of  the  death  of 
said  partner  of  the  second  part,  then  the  signature  of  the 
survivors  shall  suffice. 

XI.  It  is  further  agreed  that  said  copartners  shall  on 


380    BUSINESS  ORGANIZATION  DOCUMENTS 

the  first  day  of  January,  in  each  year  hereafter,  during  the 
continuance  of  this  agreement,  or  oftener  if  necessary, 
make,  yield  and  render  each  to  the  other  a  just,  true  and 
perfect  inventory  or  account  of  all  profits  and  increase  by 
them  or  either  of  them  made  in  their  said  business  and  of  all 
loss  by  them  or  either  of  them  sustained  in  their  said  co- 
partnership business.  Also  all  payments,  receipts,  dis- 
bursements and  all  other  things  by  them  or  either  of  them 
received,  made,  disbursed,  acted,  done  or  suffered  in  their 
said  business.  Upon  said  annual  account  each  of  said 
parties  shall  pay  and  bear  his  just  share  of  such  rents,  ex- 
penses and  losses  as  may  be  made  as  aforesaid,  and  should 
there  have  been  any  profits  in  said  business  over  and  above 
rents,  expenses  and  losses  his  just  share  thereof  shall  be  as- 
certained and  of  said  share  he  shall  then  bo  entitled  to 
withdraw  for  his  own  use  the  equal  one-third  part  and  the 
remaining  two-thirds  shall  be  placed  to  his  credit  and  shall 
not  be  subject  to  withdrawal  until  the  end  or  sooner  ter- 
mination of  this  copartnership,  unless  otherwise  consented 
to  in  writing  by  the  other  copartners. 

XII.  If  at  any  time  hereafter  and  before  the  accounts 
between  the  parties  concerning  the  said  copartnership  shaU 
be  finally  settled  and  closed,  any  dispute  or  difference  shall 
arise  between  the  parties  hereto,  concerning  the  true  con- 
struction of  anything  in  these  presents,  or  any  accounts  to 
be  stated  or  settled  in  pursuance  hereof,  or  the  valuation  of 
the  assets,  or  anything  relating  to  the  partnership  or  the 
concerns  thereof,  or  out  of  the  acts  or  omissions  of  either 
party  to  this  agreement,  then  and  so  often  as  the  same  shall 
happen,  all  such  matters  in  difference  shall  be  submitted 
and  referred  to  the  award  and  determination  of  five  arbi- 
trators, to  be  chosen  one  by  each  of  the  parties  to  this 
agreement,  and  the  fourth  and  fifth  arbitrators  shall  be 
chosen  by  the  three  chosen  by  the  parties  hereto,  and  the 
decision  and  aAvard  of  an}^  three  of  the  five  arbitrators  in 
writing  shall  be  binding  and  final  between  the  parties  to 
this  agreement,  and  shall  be  carried  out  and  perfomied  by 
them. 

XIII.  On  the  dissolution  of  this  copartnership  a  final 
accounting  shall  be  had  concerning  all  things  comiected  with 
the  business,  and  after  pa}anent  of  all  lawful  debts  of  said 
firm  and  the  repayment  of  the  contribution  of  said  party. 


ARTICLES  OF  COPARTNERSHIP  381 

of  tlio  first  part  to  said  finn,  all  and  cvciy  tlio  assets  of  said 
firm  sliall  be  rodnood  to  inonoy  and  tlic  pi'occods  divided  in 
pro])ortioii  to  the  interest  of  the  parties  hereto,  as  shown 
by  the  books  of  said  firm. 

It  is  expressly  understood  and  agreed  that  in  case  such 
copartnership  is  dissolved  before  the  expiration  of  the  time 
herein  fixed,  then  and  in  that  event,  said  party  of  the  sec- 
ond i)art  u})on  such  dissolution  shall  be  entitled  to  a  further 
credit  of  seven  hundred  and  fifty  dollars  on  the  l)ooks  of  said 
firm,  as  an  additional  consideration  for  his  contribution  to 
the  capital  therof. 

XrV.  In  the  event  of  the  death  of  either  of  the  said 
parties  hereto  before  the  time  herein  fixed  for  the  dissolu- 
tion of  said  copartnership,  such  copartnershi])  shall  never- 
theless be  continued  between  the  survivincf  parties  hereto 
upon  the  same  terms.  And  it  is  further  agreed  that  the 
legal  representative  of  said  decedent  shall  succeed  to  all 
the  rights  and  benefits  of  said  decedent,  and  that  said  co- 
partnership shall  be  continued  with  said  re]n'esentative  of 
said  decedent,  if  he  so  elects,  in  the  latter's  stead,  upon 
the  same  terms  as  hereinbefore  provided,  saving  that  said 
representative  of  said  decedent  shall  be  relieved  from  any 
contribution  in  lieu  of  the  services  of  said  decedent,  and 
that  the  share  of  the  profits  and  losses  of  such  representa- 
tive shall  be  reduced  one-half,  and  the  shares  of  the  surviv- 
ors equally  increased  to  the  extent  of  such  one-half,  and 
further  the  weekly  drawings  of  such  representative  of 
such  decedent  shall  be  reduced  one-half. 

It  is  also  understood  and  agreed  that  in  case  of  the  death 
of  either  of  the  parties  hereto,  before  the  time  herein  fixed 
for  the  dissolution  of  said  copartnership,  the  representative 
of  said  decedent,  in  the  event  of  his  election  not  to  continue 
the  same  as  in  the  last  ]^aragraph  provided,  shall  neverthe- 
less not  be  entitled  to  withdraw  the  shai-e  of  said  decedent 
from  such  co])artnei"shii),  if  solvent,  until  the  expiration  of 
six  months  after  such  death,  and  in  that  meantime,  the  rep- 
resentative of  such  decedent  shall  be  entitled  to  and  bear 
an  amount  equal  to  one-half  of  the  profits  and  losses  said 
decedent  would  have  been  entitled  to  and  home  if  living, 
and  interest  upon  the  share  of  said  decedent  from  th(»  time 
of  his  death  mitil  such  payment,  at  the  rate  of  five  per  cent 
pcT-  annunu    The  representative  of  such  decedent  shall. 


382    BUSINESS  ORGANIZATION  DOCUMENTS 

notify  in  writing  tlie  surviving  partners  of  his  election 
under  the  above  provisions  within  sixty  days  after  such 
decease — otherwise  he  shall  be  deemed  to  elect  to  withdraw 
the  shares  of  such  decedent. 

XV.  It  is  also  expressly  agreed  that  a  waiver  by  either 
of  the  parties  hereto  of  any  breach  of  any  covenant,  agree- 
ment or  condition  of  tliis  instrument  shall  not  bar  his  right 
to  avail  himself  of  any  subsequent  breach  of  any  such  cove- 
nant, agreement  or  condition. 

IN  WITNESS  WHEREOF,  the  parties  to  these  pres- 
ents have  hereunto  set  their  hands  and  seals  as  of  the 
day  and  year  first  above  written. 

Henry  Gardes 
Harvey  Wilson 
James  Haskins 
Sealed  and  delivered 
in  the  presence  of 

Jasper  Freeman. 

STATE  OF  NEW  YORK  ) 

)ss.: 
City  and  County  of  New  York  ) 

On  this  13th  day  of  April,  1905,  before  me  personally 
came  Henry  Gardes,  Harvey  Wilson  and  James  Haskins, 
to  me  known  and  known  to  me  to  be  the  individuals  des- 
cribed in  and  who  executed  the  foregoing  instrument  and 
they  duly  and  severally  acknowledged  to  me  that  they  ex- 
ecuted the  same. 

Wells  H.  Harris, 

Notary  Public  in  and 
for  New  York  County. 


11.     CONTRACTS. 

(A)— GENERAL  CON^M^^C^T  TO  FOR^I  A 
CORPORATION.* 

This  Ac^rocmcnt  made  this  first  day  of  November,  A.  D., 
1909,  by  and  ])et\v('eii  the  undersigned,  John  Brown,  Wil- 
liam Burbank,  Edward  Cunningham  and  Raymond  Wil- 
liams, all  of  the  City  of  Chicago  and  State  of  Illinois. 

Witnesseth,  That  in  consideration  of  the  mutual  under- 
takings and  agreements  of  the  parties  hereto,  as  hereinafter 
set  forth,  and  in  further  consideration  of  the  sum  of  one 
dollar  by  each  of  the  said  parties  to  the  other  in  hand  paid 
(at  the  time  of  the  execution  hereof),  the  receipt  of  which 
is  hereby  severally  acknowledged,  the  said  parties  to  this 
contract  hereby  agree  by  and  among  themselves  and  \\ith 
each  other  as  follows,  to-wit: 

First,  That  a  corporation  shall  be  formed  by  us  under 
the  laws  of  Illinois  substantially  as  follows: 

(a)  The  name  thereof  to  be  the  Perfect  Automobile 
Company. 

(b)  The  capital  stock  of  said  corporation  to  be  One 
Hundred  Thousand  ($100,000.00)  Dollars,  divided  into  one 
thousand  (1,000)  shares  of  One  Hundred  ($100.00)  Dollai-s 
each,  said  stock  to  be  all  Common  Stock  of  unifomi  char- 
acter and  usual  fonn. 

(c)  The  purpose  of  said  corporation  to  be  substantial- 
ly for  the  manufacture  and  sale  of  automobiles  and  their 
parts. 

(d)  Said  corporation  shall  have  a  Board  of  Directors 
consisting  of  five  in  number,  who  shall  all  be  stockholders 
of  record  at  the  time  of  their  election. 


♦From  Frank's   Science  of  Organization  and  Business   Development. 

383 


384    BUSINESS  ORGANIZATION  DOCUMENTS 

(e)  The  officers  of  said  corporation  shall  be  a  Presi- 
dent, Vice-President,  Secretary,  Treasurer  and  General 
Manager. 

(f)  The  location  of  the  principal  office  to  be  at  Chi- 
cago. 

(g)  The  duration  of  said  corporation  to  be  99  years. 
Second,  We  hereby  agree  with  each  other,  and  the  one 

with  the  other,  that  we  will  take  the  number  of  shares  of 
the  capital  stock  of  said  corporation  set  opposite  our  res- 
pective names  hereunto  subscribed,  and  will  pay  to  the 
commissioners  duly  appointed  by  the  Secretary  of  State  of 
Illinois  in  that  behajf,  fifty  (50%)  per  cent  of  the  par  value 
of  the  said  shares  so  subscribed  by  us  respectively  at  the 
time  of  holding  the  first  meeting  of  the  said  subscribers 
to  elect  a  Board  of  Directors  for  said  corporation;  and  we 
further  agree  to  pay  the  balance  of  our  said  subscriptions 
whenever  called  upon  so  to  do  by  the  Board  of  Directors  of 
said  corporation,  after  the  same  shall  be  formed. 

Third,  We  further  nominate,  constitute  and  appoint, 

(^ )  j^g  Q-^^Y  (attorney  or)  agent,  and  the 

agent  (or  attorney)  of  the  said  corporation  so  to  be  formed, 
to  create  or  cause  to  be  created  the  said  corporation  in 
accordance  with  the  laws  of  Illinois  and  this  agreement, 
and  to  do  and  perform  all  things  necessary  to  bring  said 
corporation  into  legal  existence;  and  we  further  author- 
ize and  empower  our  said  agent  (or  attorney)  to  draw  on 
the  funds  in  the  hands  of  the  legally  constituted  officers  of 
agents  of  said  corporation,  for  the  necessary  expenses  at- 
tending said  incorporation,  and  we  further  agree  that  any 
and  all  contracts  which  our  said  (attorney  or)  agent  may 
make  in  such  matter  shall  be  binding  upon  said  corporation 
and  also  upon  us  jointly  and  severally. 

In  Witness  Whereof,  we,  the  undersigned,  hereby  sev- 
erally bind  ourselves,  our  heirs,  executors  and  administra- 
tors. 


PROMOTER'S  CONTRACTS 


385 


N'amc 


Address 


Shares 


Amount 


(B)— PRO:^rOTER'S  CONTRACT.* 

Wliereas,  the  undersigned  subscribers  contemplate  the 
organization  of  a  corporation  under  the  laws  of  the  State 

(or  teiTitory)  of ,  to  be  knowm  by  the 

name  of  .  /. ,  or  by  such  other 

name  as  the  subscribing  stockholders  therein  may  adopt, 

having  an  authorized  capital  stock  of  $ , 

divided  into shares  of  $ each,  for  the 

purpose  of  (state  object  of  corporation  briefly). 

It  is  hereby  agreed  by  and  between  said  subscribers  and 
(promoter's  name) : 

(1)  That  each  of  said  subscribei^  will  take  the  amount 
of  stock  in  said  coi-poration  set  opposite  his  name  and  pay 
for  the  same  according  to  the  terais  of  a  subscription  con- 
tract this  day  executed  by  them. 

(2)  That  said  (promoter's  name)  has  heretofore  done 
work  and  perfonned  services  of  great  value  in  preparing 
for  the  organization  of  said  corporation  and  securing  sub- 
scriptions to  its  capital  stock,  and  is  to  hereafter  perform 
additional  sen'ices  in  perfecting  its  organization  and  secur- 
ing bona  fide  sul)Scriptious  to  the  cajiital  stock  of  said  cor- 
poration aggregating  (aside  from  the  stock  taken  by  tlx* 

subscribers  hereto)  the  sum  of  $ ,  or  such  pari 

thereof  as  the  subscribing  stockholders  may  deem  neces- 
sary to  dispose  of. 

*  From  ^^odern  Business  Corporations,  by  Wm.  Allen  Wood  and  L.  B.  Ew- 
bank.     The  Bobbs-Merrill  Co. 
B — 11—26 


386    BUSINESS  ORGANIZATION  DOCUMENTS 

(3)  Said  (promoter's  name)  shall  have days 

in  which  to  secure  subscriptions  for  the  aforesaid  $ 

of  capital  stock  of  said  company,  and  if  he  has  failed  to  do 
so  at  the  end  of  that  time  the  subscribers,  at  their  option, 
may  extend  his  authority,  or  may  recall  it,  and  may,  if  they 

so  elect,  subscribe  for  the  remaining  portion  of  said  $ 

of  capital  stock  which  then  remains  unsubscribed  for,  or  in- 
duce others  to  take  it,  or  abandon  the  formation  of  said 
corporation. 

(4)  Upon  the  incorporation  of  said  proposed  com- 
pany there  shall  be  issued  to  said  (promoter's  name),  or  to 
any  person  designated  by  him,  by  indorsement  on  this 
agreement,  in  pa\Tnent  for  his  services  in  effecting  such  in- 
corporation and  securing  the  aforesaid  subscriptions  to  the 

capital  stock  as  above  provided, shares  of  the 

capital  stock  of  said  corporation. 

Provided,  That  if  said  (promoter's  name)  shall  have 
failed  to  secure  bona  fide  subscriptions  to  said  capital  stock 

in  the  full  amount  of  $ ,  there  shall  be  issued  to  him 

only  such  proportion  of shares  of  stock  as  the  cap- 
ital stock  for  which  he  has  obtained  subscriptions  is  of 
$ ,  the  whole  amount  for  which  he  hereby  under- 
takes to  solicit  subscriptions. 

Provided,  further,  That  if  said  company  be  incorporat- 
ed before  the  time  allowed  said  (promoter's  name)  for  ob- 
taining subscriptions  has  expired  and  said  (promoter's 
name)  shall  thereafter,  under  the  terms  of  this  contract 
secure  additional  bona  fide  subscriptions  to  the  capital  stock 
of  said  company,  as  above  provided,  shares  of  stock  shall 
be  issued  within  thirty  days  after  the  said  time  allowed  for 
obtaining  subscriptions  has  expired  to  (promoter's  name), 
or  to  his  assignee,  as  above  provided,  in  the  proportion  of 

one  share  of  stock  for  each  $ of  capital  stock  for 

which  subscriptions  are  so  secured  by  him. 

In  Witness  Whereof  the  said  subscribers  have  hereunto 
attached  their  names  and  designated  the  number  of  shares 


UNDERWRITING  AGREEMENTS  387 

taken  l)y  each  of  them,  and  said  (promoter's  name)  has 

agreed  to  the  above  terms. 

Shares 


I  agree  to  the  above  terms. 

(Signed  by  promoter). 

(C)_UNDERWRITIXG  AGREE:\IEXT. 
THE  UNITED  STATES  SHIPBUILDIXG  CO:\IPANY. 

A  coi-poration  to  be  organized  under  the  laws  of  the  State 
of  New  Jersey,  either  by  that  or  some  similar  name,  pro- 
poses to  acquire  the  plants  and  equipment  of  the  following 
concerns,  or  their  capital  stock,  free  from  any  liens: 

The  Union  Iron  Works,  San  Francisco,  California. 

The  Bath  Iron  Works,  Limited,  and  The  Hyde  Wind- 
lass Company,  Bath,  Maine. 

The  Crescent  Shipyard  and  The  Samuel  L.  :sroore  & 
Sons  Co.,  Elizabethport,  New  Jersey. 

The    Eastern    Shipbuilding    Company,    New    London, 

Conn. 

The  Harlan  &  Ilollingsworth  Co.,  Wilmington,  Dela- 
ware. 

The  Cauda  Manufacturing    Company,    Carteret,    New 

Jersev. 


Underwriting  Agreement. 

For  $9,000,000  Series  A  First  Mortgage,  Five  Per  Cent 
Sinking  Fund,  Gold  Bonds,  due  1932,  part  of  an  authorized 
issue  of  $16,000,000  Bonds  of  $1,000  each,  $5,500,000  being 
withdrawn  from  public  issue  for  disposal  under  the  Ven- 
dor's and  Subscribers'  Contracts,  and  $1,500,000  being  Re- 
served in  the  Treasury  of  the  Company.    Additional  Bonds 


388    BUSINESS  ORGANIZATION  DOCUMENTS 

may  be  issued  only  for  the  purpose  of  acquiring  Additional 
Plants  and  Equipment  and  for  Improvements  and  Better- 
ments, upon  such  Terms  and  Conditions  as  shall  be  Ap- 
proved by  the  Holders  of  a  Majority  of  the  Bonds  under 
the  Present  Issue  Outstanding  at  the  Time  of  such  Ap- 
proval. 


We,  the  undersigned,  each  for  himself,  with  The  Mer- 
cantile Trust  Company,  for  itself  and  for  the  United  States 
Shipbuilding  Company,  and  to  and  with  each  other,  agree 
to  subscribe  to,  receive  and  pay  for  the  amount  of  five  per 
cent  first  mortgage,  sinking  fund,  gold  bonds  of  the  United 
States  Shipbuilding  Company  of  one  thousand  dollars 
each,  set  opposite  our  respective  signatures  hereto,  at  the 
price  of  $900  for  each  bond,  25  per  cent  to  be  paid  upon 
allotment  and  the  balance  upon  the  demand  of  The  Mer- 
cantile Trust  Company. 

We  further  agree  to  receive  and  pay  for  any  smaller 
amount  than  that  subscribed  for  which  may  be  allotted  to 
us  respectively. 

The  conditions  of  this  underwriting  agreement  are  as 
follows : 

(1)  That  this  agreement  shall  not  be  binding  upon 
the  undersigned  unless  the  entire  amount  of  $9,000,000  of 
bonds  shall  have  been  underwritten. 

(2)  That  within  such  reasonable  time  as  shall  be  fixed 
by  The  Mercantile  Trust  Company  the  said  $9,000,000  of 
bonds,  less  any  amount  withdra^^^l  by  the  underwriters,  as 
hereinafter  set  forth,  will  be  offered  to  the  public,  through 
such  banker  or  bankers  or  brokers  as  shall  be  designated 
by  The  Mercantile  Trust  Company,  for  subscription  at  not 
less  than  95  per  cent. 

(3)  With  the  consent  of  The  Mercantile  Tmst  Com- 
pany, any  other  concern  may  be  included  in  this  combina- 


UNDERWRITING  AGREEMENTS  389 

tion,  or  others  sn])stitiito(l  therefor,  provided  the  working 
effieiency  or  values  are  not  lessened  or  impaired. 

(4)  That,  if  the  amount  of  honds  suhseribed  and  paid 
for  upon  sueh  public  issues  be  at  least  equal  to  the  amount 
of  bonds  so  offered  to  the  public,  then  all  liability  under 
this  agreement  shall  cease. 

(5)  That,  in  case  the  amount  of  bonds  subscri])ed  for 
upon  such  public  offering  shall  be  less  than  the  total  amount 
of  bonds  so  offered  to  the  public,  or  in  case  the  bonds  sub- 
scribed for  upon  such  public  issue  shall  not  be  paid  for  to 
an  amount  equal,  at  the  rate  of  95  per  cent,  to  the  total  of 
such  jniblic  offering,  then  such  deficiency  in  subscriptions 
and  payments  will,  u])on  the  demand  of  The  Mercantile 
Trust  Company,  be  made  good  by  the  subscribers  hereto 
in  the  manner  aforesaid,  ]>n>  rafa  in  the  proportion  their 
subscriptions  for  bonds  not  withdrawn  by  them  from  public 
issue  bear  to  the  total  amount  of  bonds  so  offered  to  the 
public. 

(6)  That  each  underwriter  shall  receive  in  preferred 
and  common  stock  of  the  United  States  Shipbuilding  Com- 
pany 25  per  cent  of  the  par  value  of  the  bonds  hereby 
underwritten  in  each  kind  of  stock,  and  also  that  all  the 
proceeds,  not  to  exceed  5  per  cent,  realized  from  the  sale  of 
the  bonds  at  public  issue  in  excess  of  90  per  cent,  after  de- 
ducting issue  expenses,  shall  belong  to  the  underwriters. 

(7)  That  any  imderwriter  shall  have  the  option  of 
withdrawing  from  the  public  issue  any  of  the  ])onds  hereby 
underwritten  by  him,  provided  that  he  notify  The  Mer- 
cantile Trust  Company,  five  days  prior  to  the  date  fixed  for 
the  public  issue,  that  he  elects  to  purchase  said  bonds,  pro- 
vided  that,  in  the  proportion  of  the  l)onds  so  purchased,  he 
waives  his  said  right  to  participate  in  the  r-nsh  proceeds 
realized  from  the  public  issue. 

(8)  That  no  underwriter  shall  sell  or  offer  for  sale 
the  bonds  so  purchased,  nor  any  of  the  bonus  shares  he  re- 


390     BUSINESS  ORGANIZATION  DOCUMENTS 

ceives,  until  twelve  months  after  the  date  of  payment, 
without  the  consent  of  The  Mercantile  Trust  Company. 

New  York,  April  19,  1902. 

Name  Address  Bonds  Underwritten. 


III.  CORPORATION  ACTS. 

(A)— EXTRACTS  FROM  THE  ILLINOIS  ACT. 


AN  ACT  covcerning  Corporations.  [Approved  April  18, 
1872;  in  force  July  1,  1872;  and  amendments  thereto  in 
force  July  1, 1905.] 

Section  1.  Be  it  enacted  hy  the  People  of  the  State  of 
Illinois,  represented  in  the  General  Assembly:  That  cor- 
porations may  be  formed  in  the  manner  provided  by  this  act, 
for  any  lawful  purpose  except  banking,  insurance,  real  es- 
tate, brokerage,  the  operation  of  railroads  and  the  business 
of  loaning  money:  Provided,  that  horse  and  dummy  rail- 
roads, and  organizations  for  the  purchase  and  sale  of  real 
estate,  for  burial  pui-poses  only,  may  be  organized  and  con- 
ducted under  the  provisions  of  this  act:  And,  provided, 
further,  that  corporations  formed  for  the  purpose  of  con- 
structing railroad  bridges  shall  not  be  held  to  be  railroad 
coi-porations.  [As  amended  by  act  approved  April  19, 
1879;  in  force  July  1,  1879.] 

§  2.  Whenever  any  number  of  persons  not  less  than 
three,  nor  more  than  seven,  shall  propose  to  form  a  corpora- 
tion under  this  act,  they  shall  make  a  statement  to  that  ef- 
fect under  their  hands  and  duly  acknowledged  before  some 
officer  in  the  manner  provided  for  the  acknowledgment  of 
deeds,  setting  forth  the  name  of  the  proposed  corporation, 
the  object  for  which  it  is  to  be  formed,  its  capital  stock,  the 
number  of  shares  of  which  such  stock  shall  consist,  the  loca- 
tion of  the  principal  office  and  the  duration  of  the  corpora- 
tion, not  to  exceed  ninety-nine  years,  which  statement  shall 
be  filed  in  the  office  of  the  Secretary  of  State.  If  the  object 
for  which  said  corporation  is  proposed  to  be  organized  is 

391 


392     BUSINESS  ORGANIZATION  DOCUMENTS 

clearly  and  definitely  stated,  and  is  a  lawful  object,  the  Sec- 
retary of  State  shall  thereupon  issue  to  such  persons  a 
license  as  commissioners  to  open  books  for  subscription  to 
the  capital  stock  of  said  corporation  at  such  times  and 
places  as  they  may  determine ;  but  no  license  shall  be  issued 
to  two  companies  having  the  same  or  a  similar  name,  nor 
shall  any  foreign  corporation  having  the  same  or  a  similar 
name  as  any  domestic  corporation  be  admitted  to  this  State 
under  any  foreign  corporation  law  and  no  domestic  corpora- 
tion shall  hereafter  be  organized  with  the  same  or  a  similar 
name  as  any  foreign  corporation  previously  admitted  to 
do  business  in  this  State.    Upon  the  filing  of  any  statement 
with  the  Secretary  of  State  for  the  purpose  of  obtaining 
a  license  to  incorporate,  he  may  propound  such  interroga- 
tories as  he  shall  deem  necessary  to  ascertain  the  true  ob- 
ject:   Provided,  that  the  Attorney-General  may  file  a  bill 
in  chancery  in  the  name  of  the  People  of  the  State  of  Ill- 
inois, against  any  corporation  authorized  to  confer  degrees, 
diplomas  or  other  certificate  or  certificates  of  qualification 
in  the  science  of  medicine,  pharmacy  or  dentistry  which 
conducts  a  fraudulent  business  or  abuses,  misuses  or  vio- 
lates the  terms  of  its  charter,  in  any  court  having  jurisdic- 
tion of  the  corporation  and  subject-matter  of  such  bill,  for 
an  injunction  to  restrain  said  corporation  from  conducting 
its  business  fradulently  or  abusing,  misusing  or  violating 
the  terms  of  its  charter  and  also  for  the  dissolution  of  said 
corporation,  and  thereupon  it  shall  be  the  duty  of  the 
court  in  which  said  bill  is  filed  to  grant  such  injunction  and 
to  hear  and  determine  the  same  as  in  other  cases  in  chan- 
cery:   And  provided,  further,  that  this  act  shall  apply  to 
schools,  colleges  or  universities  which  now  are,  or  may  here- 
after be  licensed  in  this  State,  notwithstanding  any  pro- 
visions that  may  exist  in  their  charters.     [As  amended  by 
act  approved  May  16, 1905;  in  force  July  1, 1905.] 

§  3.     As  soon  as  may  be,  after  the  capital  stock  shall 
be  fully  subscribed,  the  commissioners  shall  convene  a  meet- 


CORPORATION  ACTS  393 

ing  of  the  subscribers^  for  the  purpose  of  elerting  rlirectors 
or  mauacfors,  and  the  transaction  of  such  other  })nsiness  as 
shall  come  before  them.  Notice  thereof  shall  be  given  hy 
depositing  in  the  postoffice,  properly  addressed  to  each  sub- 
scriber, at  least  ten  days  before  the  time  fixed,  a  written 
or  printed  notice,  statiuf]:  the  object,  time  and  place  of  such 
meeting.  In  all  elections  for  directors  or  managei's  of  cor- 
porations organized  under  this  act,  every  subscriber  or 
stockholder  shall  have  the  right  to  vote  in  person,  or  by 
proxy,  for  the  niunber  of  shares  owned  or  subscribed  by 
him,  for  as  many  persons  as  there  are  directors  or  managers 
to  be  elected,  or  to  cumulate  such  shares  and  give  one  candi- 
date as  many  votes  as  the  number  of  directors  or  managers 
multiplied  by  the  number  of  his  shares  of  stock  shall  equal, 
or  to  distribute  them  on  the  same  principle  among  as  many 
candidates  as  he  shall  think  fit;  and  such  directors  or  man- 
agers shall  not  be  elected  in  any  other  manner.  It  shall  be 
lawful  for  any  such  corporation,  by  resolution  of  the  stock- 
holdei*s,  to  divide  its  board  of  directors  or  managers  into 
three  classes,  numbered  consecut'  /ely,  the  tenu  of  office  of 
the  first  class  to  expire  on  the  uay  of  the  annual  election 
of  said  company  then  next  ensuing;  the  second  class  one 
year  thereafter;  and  the  third  class  two  years  thereafter. 
At  each  annual  election,  after  such  classification,  the  stock- 
holders of  such  company  shall  elect,  for  a  term  of  three 
years,  a  number  of  directors  or  managers  equal  to  the  num- 
ber in  the  class  whose  tenn  expires  on  the  day  of  such 
election,  all  other  vacancies  to  be  filled  in  accordance  with 
the  by-laws  of  the  corporation. 

§  4.  The  commissioners  shall  make  a  full  report  of 
their  proceedings,  including  therein  a  copy  of  the  notice 
provided  for  in  the  foregoing  section,  a  copy  of  the  subscrip- 
tion list,  a  statement  of  the  amount  of  the  capital,  not  less 
than  one-half  actually  paid  in,  the  amount  of  such  capital 
not  paid  in,  what  disposition  has  been  made  of  stock  sub- 
scribed and  not  paid,  and  if  any  proportion  of  the  capital 


394     BUSINESS  ORGANIZATION  DOCUMENTS 

has  been  paid  in  property,  tlie  same  shall  be  appraised  by 
said  commissioners  and  they  shall  report  the  fair  cash 
value  thereof;  the  names  of  the  directors  or  managers  elect- 
ed and  their  respective  tenns  of  office,  which  report  shall  be 
sworn  to  by  at  least  a  majority  of  the  commissioners  and 
shall  be  filed  in  the  office  of  the  Secretary  of  State.  The 
Secretary  of  State  shall  thereupon  issue  a  certificate  of  the 
complete  organization  of  the  corporation,  making  a  part 
thereof  a  copy  of  all  the  papers  filed  in  his  office  in  and  about 
the  organization  of  the  corporation,  and  duly  authenticated 
under  his  hand  and  seal  of  State,  and  the  same  shall  be  re- 
corded in  a  book  for  that  purpose,  in  the  office  of  the  re- 
corder of  deeds  of  the  county  where  the  principal  office  of 
such  company  is  located.  Upon  the  recording  of  the  said 
copy,  the  corporation  shall  be  deemed  fully  organized  and 
may  proceed  to  business.  Unless  such  company  shall  be 
organized  and  shall  proceed  to  business  as  provided  in  this 
act  within  two  years  after  the  date  of  such  license,  then  such 
license  shall  be  deemed  revoked,  and  all  proceedings  there- 
under void.  [As  amended  by  act  approved  May  16,  1905; 
in  force  July  1,  1905.] 

§  5.  Corporations  formed  under  this  act  shall  be  bodies 
corporate  and  politic  for  the  period  for  which  they  are  or- 
ganized; may  sue  and  be  sued;  may  have  a  common  seal 
which  they  may  alter  or  renew  at  pleasure ;  may  ovm,  pos- 
sess and  enjoy  so  much  real  and  personal  estate  as  shall  be 
necessary  for  the  transaction  of  their  business,  and  may 
sell  and  dispose  of  the  same  when  not  required  for  the  uses 
of  the  corporation.  They  may  borrow  money  at  legal  rates  of 
interest,  and  pledge  their  property,  both  real  and  personal, 
to  secure  the  payment  thereof;  and  may  have  and  exercise 
all  the  powers  necessary  and  requisite  to  carry  into  effect 
the  objects  for  which  they  may  be  formed:  Provided,  how- 
ever, that  all  real  estate,  so  acquired  in  satisfaction  of  any 
liability  or  indebtedness,  unless  the  same  may  be  necessary 
and  suitable  for  the  business  of  such  corporation,  shall  be 


CORPORATION  ACTS  395 

offered  at  public  auction  at  least  ouce  every  year,  at  the 
door  of  the  court  house  of  the  county  wherein  the  same  be 
situated,  or  on  the  premises  to  be  sold,  after  giving  notice 
thereof  for  at  least  four  consecutive  weeks  in  some  news- 
paper of  general  circulation  published  in  said  county;  and 
if  there  be  no  such  newspaper  pul)lished  therein,  then  in 
the  nearest  adjacent  county  where  such  newspaper  is  pul)- 
lished;  and  said  real  estate  shall  be  sold  whenever  the  price 
offered  for  it  is  not  less  than  the  claim  of  such  coiT)oration, 
including  all  interests,  costs,  and  other  expense:    And,  pro- 
vided, further,  that  in  case  such  corporation  shall  not,  with- 
in such  period  of  five  years,  sell  such  land,  either  at  public  or 
private  sale  as  aforesaid,  it  shall  be  the  duty  of  the  State's 
attorney  to  proceed  by  information,  in  the  name  of  the  Peo- 
ple of  the  State  of  Illinois,  against  such  corporation,  in  the 
circuit  court  of  the  county  within  which  such  land,  so  neg- 
lected to  be  sold,  shall  be  situated,  and  such  court  shall  have 
jurisdiction  to  hear  and  determine  the  fact,  and  to  order  the 
sale  of  such  land  or  real  estate  at  such  time  and  place  sub- 
ject to  such  rules  as  the  court  shall  establish.    The  court 
shall  tax  as  the  fees  of  the  State's  attorney  such  sum  as  shall 
be  reasonable ;  and  the  proceeds  of  such  sale,  after  deduct- 
ing the  said  fees  and  costs  of  proceeding,  shall  be  paid  over 
to  such  corporation.    The  provisions  of  this  section  shall 
apply  to  and  be  binding  upon  all  corporations  now  exist- 
ing by  virtue  of  any  special  charter  granted  by  this  State. 
[As  amended  by  act  approved  June  5,  1889;  in  force  July 
1,  1889.] 

§  6.  The  corporate  powers  shall  be  exercised  by  a 
board  of  directors  or  managers.  Provided,  the  number  of 
directors  or  managers  shall  not  be  increased  or  dhninished, 
or  their  term  of  office  changed,  without  the  consent  of  the 
owners  of  a  majority  of  the  shares  of  stock.  The  officers  of 
the  company  shall  consist  of  a  president,secretary  andtreas- 
urer,  and  such  other  officers  and  agents  as  shall  be  deter- 
mined by  the  directors  or  managei"s,  and  the  directors  or 


396     BUSINESS  ORGANIZATION  DOCUMENTS 

managers  may  adopt  by-laws  for  the  government  of  the  of- 
ficers and  affairs  of  the  company:  Provided,  they  are  not 
inconsistent  ^Yith  the  laws  of  this  State.  The  directors  or 
managers  ma}^  require  of  the  officers  and  agents  bonds,  with 
such  sureties  and  conditions  as  they  shall  deem  proper  and 
may  remove  any  officers  when  the  interest  of  the  corpora- 
tion shall  require.  The  officers  shall  hold  their  respective 
offices  for  the  period  provided  by  the  by-laws. 

§  7.  The  shares  of  stock  shall  be  not  less  than  ten  nor 
more  than  one  hundred  dollars  each,  and  shall  be  deemed 
personal  property,  and  transferable  as  such  in  the  manner 
provided  by  the  by-laws,  and  subscriptions  therefor  shall 
be  made  payable  to  the  corporation,  and  shall  be  payable  in 
such  installments  and  at  such  time  or  times  as  shall  be  de- 
termined by  the  directors  or  managers,  and  an  action  may 
be  maintained  in  the  name  of  the  corporation  to  recover 
an}"  installment  which  shall  remain  due  and  unpaid  for  the 
period  of  twenty  days  after  personal  demand  therefor,  or, 
in  case  where  personal  demand  is  not  made,  within  thirty 
days  after  a  written  or  printed  demand  has  been  deposited 
in  the  jDost  office  properly  addressed  to  the  post-office  ad- 
dress of  the  stockholder.  The  directors  may,  by  by-laws, 
prescribe  other  penalties  for  a  failure  to  pay  the  install- 
ments that  may  from  time  to  time  become  due,  but  no 
penalty  working  a  forfeiture  of  stock,  or  of  the  amounts 
paid  thereon  shall  be  declared  as  against  any  estate  before 
distribution  shall  have  been  made  or  against  any  stock- 
holder before  demand  shall  have  been  made  for  the 
amount  due  thereon,  either  in  person  or  by  a  written  or 
printed  notice  duly  mailed  to  the  proper  address  of  such 
stockholder  at  least  thirty  days  prior  to  the  time  when  such 
forfeiture  is  to  take  effect:  Provided,  that  proceeds  of 
said  sale  over  and  above  the  amount  due  on  said  shares  shall 
be  paid  to  the  delinquent  stockholder. 

§  8.  Every  assignment  or  transfer  of  stocks  on  which 
there  remains  any  portion  unpaid  shall  be  recorded  in  the 


CORPORATION  ACTS  397 

office  of  the  recorder  of  deeds  of  the  county  within  wliicli 
the  ])rincipal  office  is  h)cated,  and  each  stockhohler  shall 
be  liable  for  the  debts  of  the  cori)oration  to  the  extent  of 
the  amount  that  may  be  unpaid  upon  the  stock  held  by 
him,  to  be  collected  in  the  manner  herein  provided.  No  as- 
signor of  stocks  shall  be  released  from  any  such  indebted- 
ness by  reason  of  any  assignment  of  his  stock,  but  shall  re- 
main liable  therefor,  jointl.y  with  the  assignee,  until  the 
said  stock  be  fully  paid.  Whenever  any  action  is  brought 
to  recover  any  indebtedness,  against  the  corporation,  it 
shall  be  competent  to  proceed  against  any  one  or  more 
stockholders  at  the  same  time  to  the  extent  of  the  balance 
unpaid  by  such  stockholders  upon  the  stock  owned  by  them, 
respectively,  whether  called  in  or  not,  as  in  cases  of  garnish- 
ment. Ever}'  assignee  or  transferee  of  stock  shall  be  liable 
to  the  company  for  the  amount  unpaid  thereon,  to  the  extent 
and  in  the  same  manner  as  if  he  had  been  the  original  sub- 
scriber. 

§  9.  The  General  Assembly  shall,  at  all  times,  have 
power  to  prescribe  such  regulations  and  provisions  as  it 
may  deem  advisable,  which  regulations  and  provisions  shall 
be  binding  on  any  and  all  corporations  foiTned  under  the 
provisions  of  this  act:  And,  provided,  further,  that  this 
act  shall  not  be  held  to  revive  or  extend  any  private  char- 
ter or  law  heretofore  granted  or  passed  concerning  any  cor- 
poration. 

§  10.  All  corporations  organized  under  this  law,  whose 
powere  may  have  expired  by  limitation  or  otherwise,  shall 
continue  their  corporate  capacity  during  the  tenn  of  two 
years  for  the  purpose  only  of  collecting  the  debts  due  said 
corporation  and  selling  and  conveying  the  property  and  ef- 
fects thereof. 

§  11.  Such  corporations  shall  use  their  respective 
names  for  the  pur])oses  aforesaid,  and  shall  be  capa])le  of 
prosecuting  an<l  defending  all  suits  in  law  or  equity. 

§  12.     The  dissolution,  for  any  cause  whatever,  of  any 


398     BUSINESS  ORGANIZATION  DOCUMENTS 

corporation  created  as  aforesaid,  shall  not  take  away  or  im- 
pair any  remedy  given  against  such  corporation,  its  stock- 
holders or  officers,  for  any  liabilities  incurred  previous  to 
its  dissolution. 

§  13.  It  shall  be  the  duty  of  the  directors  or  trustees 
of  every  stock  corporation  to  cause  to  be  kept  at  its  princi- 
pal office  or  place  of  business  in  this  State,  correct  books  of 
account  of  all  its  business,  and  every  stockholder  in  such 
corporation  shall  have  the  right  at  all  reasonable  times,  by 
himself  or  by  his  attorney,  to  examine  the  records  and  books 
of  account  of  the  corporation. 

§  14.  A  failure  to  elect  directors,  trustees,  or  officers  in 
lieu  of  trustees,  on  the  day  named  and  designated  in  the 
by-laws,  or  on  the  day  for  which  notice  was  given  for  elec- 
tion, shall  not  have  the  effect  of  dissolving  the  corporation; 
but  such  election  may  be  held  at  any  time  after  proper 
notice. 

§  15.  All  assessments  or  installments  of  the  stock  of 
any  stock  corporation  shall  be  levied  by  the  directors  in  ac- 
cordance with  the  provisions  of  the  by-laws,  but  any  as- 
sessment or  installment  required  to  be  paid  shall  be  levied 
pro  rata  upon  all  the  shares  of  such  stock. 

§  16.  If  the  indebtedness  of  any  stock  corporation  shall 
exceed  the  amount  of  its  capital  stock,  the  directors  and  of- 
ficers of  such  corporation  assenting  thereto,  shall  be  per- 
sonally and  individually  liable  for  such  excess  to  the  cred- 
itors of  such  corporation. 

§  17.  The  president,  secretary  or  treasurer  of  every 
stock  corporation,  shall  annually,  within  twenty  days  from 
the  first  day  of  December,  make  a  statement  in  writing,  set- 
ting forth  a  description  of  all  real  estate  to  which  title  was 
acquired  in  securing  any  debt  or  liability  due  such  corpora- 
tion, together  with  the  time  of  acquiring  title  thereto; 
which  statement  shall  be  verified  by  the  oath  or  affirmation 
of  such  president,  secretary  or  treasurer,  and  be  recorded  in 


CORPORATION  ACTS  399 

the  office  of  the  recorder  of  the  county,  and  fded  in  the  of- 
fice of  the  Secretary  of  State. 

§  18.  If  any  person  or  persons,  being  or  pretending  to 
be,  an  officer  or  agent  or  board  of  directors  of  any  stock 
corporation,  or  pretended  stock  corporation,  shall  assume 
to  exercise  corporate  powers;  or  use  the  name  of  any  such 
corporation,  or  pretended  corporation,  without  complying 
with  the  provisions  of  this  act,  before  all  stock  named  in 
the  articles  of  incorporation  shall  be  subscribed  in  good 
faith,  then  they  shall  be  jointly  and  severally  liable  for  all 
debts  and  liabilities  made  by  them  and  contracted  in  the 
name  of  such  corporation  or  pretended  corporation. 

§  19.  If  the  directors  or  other  officers  or  agents  of  any 
stock  corporation  shall  declare  and  pay  any  dividend  when 
such  corporation  is  insolvent,  or  any  dividend  the  payment 
of  which  would  render  it  insolvent,  or  which  would  dimin- 
ish the  amount  of  its  capital  stock,  all  directors,  officers  or 
agents  assenting  thereto  shall  be  jointly  and  severally  li- 
able for  all  the  debts  of  such  corporation  then  existing,  and 
for  all  that  shall  thereafter  be  contracted  while  they  shall, 
respectively,  continue  in  office. 

§  20.  The  by-laws  of  every  corporation  shall  provide 
for  the  calling  of  meetings  of  the  directors,  trustees,  or 
other  officers  corresponding  to  trustees;  and  when  all  such 
officers  shall  be  present  at  any  meeting,  however  called  or 
notified,  or  shall  sign  a  written  consent  thereto  on  the  rec- 
ord of  such  meeting,  the  acts  of  such  meeting  shall  be  as 
valid  as  if  legally  called  and  notified:  Provided,  that  the 
action  of  any  meeting  held  beyond  the  limits  of  this  State, 
shall  be  void,  unless  such  meeting  was  authorized,  or  its 
acts  ratified  by  a  vote  of  two-thirds  of  the  directors,  trus- 
tees, or  officers  corresponding  to  trustees,  at  a  regular 
meeting. 

§  21.  If  any  certified  report  or  statement  made,  or 
public  notice  given  by  the  officers  or  any  corporation,  shall 
be  false  in  any  material  representation,  aU  the  officers  who 


400     BUSINESS  ORGANIZATION  DOCUMENTS 

shall  have  signed  the  same,  knowing  it  to  be  false,  shall  be 
jointly  and  severally  liable  for  all  damages  arising  there- 
from. 

§  22.  The  stockholders  of  any  stock  corporation,  own- 
ing two-thirds  of  the  stock  in  such  corporation,  upon  which 
all  assessments  have  been  fully  paid  up,  may  call  a  meet- 
ing of  the  stockholders  of  such  corporation  by  signing  a  call 
therefor  w^th  their  proper  names,  stating  the  number  of 
shares  held  by  each  and  filing  the  same  with  the  president  or 
secretary  of  such  corporation  and  publishing  the  same  in  a 
newspaper  in  this  State  where  the  principal  office  of  such 
corporation  is  kept,  and  at  the  seat  of  government,  for 
three  successive  weeks  prior  to  the  time  fixed  for  holding 
such  meeting,  and  mailing  a  copy  thereof  to  each  of  the  di- 
rectors of  said  corporation  at  his  usual  place  of  abode.  And 
the  secretary  of  such  corporation  shall  enter  such  call  upon 
the  records  thereof,  and  the  fact  of  such  publication,  and 
mailing  such  notice,  giving  the  name  of  such  paper,  with  the 
dates  and  places  of  publication  which  shall  be  prima  facie 
evidence  thereof. 

§  23.  No  person  holding  stock  in  any  corporation  as 
executor,  administrator,  conservator,  guardian  or  trustee, 
and  no  person  holding  such  stock  as  collateral  security, 
shall  be  personally  subject  to  any  liability  as  stockholder 
of  such  corporation;  but  the  person  pledging  such  stock 
shall  be  considered  as  holding  the  same  and  shall  be  liable 
as  a  stockholder  accordingly,  and  the  estate  and  funds  in 
the  hands  of  such  executor,  administrator,  conservator, 
guardian  or  trustee,  shall  be  liable  in  like  manner  and  to  the 
same  extent  as  the  testator  or  intestate,  or  the  ward  or 
person  interested  in  such  trust  fund,  would  have  been  if  he 
had  been  living  and  had  been  competent  to  act  and  held  the 
stock  in  his  own  name. 

§  24.  Every  executor,  administrator,  guardian  or  trus- 
tee shall  represent  the  stock  in  his  hands  at  all  meetings  of 
any  stock  corporation,  and  may  vote  accordingly  as  a  stock- 


CORPORATION  ACTS  401 

holder,  and  ovorv  person  who  shall  pledge  his  stock  may, 
nevertheless,  represent  the  same  at  all  meetings,  and  may 
vote  aecordingly  as  a  stoekholdc^r. 

§  25.  If  any  corporation,  or  its  authorized  agents,  shall 
do  or  refrain  from  doing  any  act  which  shall  subject  it  to  a 
forfeiture  of  its  charter  or  corporate  powers,  or  shall  allow 
any  execution  or  decree  of  any  court  of  record  for  a  pay- 
ment of  money,  after  demand  made  by  the  officer  to  be  re- 
turned "no  property  found,"  or  to  remain  unsatisfied  for 
not  less  than  ten  days  after  such  demand,  or  shall  dissolve 
ov  cease  doing  business,  leaving  debts  unpaid,  suits  in 
equity  may  be  brought  against  all  persons  who  were  stock- 
holders at  the  time,  or  liable  in  any  way  for  the  debts  of 
the  corporation  by  joining  the  corporation  in  such  suit;  and 
each  stockholder  may  be  required  to  pay  his  pro  rata  share 
of  such  debts  or  liabilities,  to  the  extent  of  the  unpaid  por- 
tion of  his  stock,  after  exhausting  the  assets  of  such  cor- 
poration, and  if  any  stockholder  shall  not  have  property 
enough  to  satisfy  his  portion  of  such  debts  or  liabilities, 
then  the  amount  shall  be  divided  equally  among  all  the  re- 
maining solvent  stockholders;  and  courts  of  equity  shall 
have  full  power,  on  good  cause  shown,  to  dissolve  or  close 
up  the  business  of  any  corporation,  to  appoint  a  receiver 
therefor  who  shall  have  authority,  by  the  name  of  the  re- 
ceiver of  such  corporation  (giving  the  name),  to  sue  in  all 
courts,  and  do  all  things  necessary  to  closing  up  its  affairs 
as  commanded  by  the  decree  of  such  court.  Said  receiver 
shall  be  in  all  cases  a  resident  of  the  State  of  Illinois,  and 
shall  be  required  to  enter  into  bonds,  payable  to  the  people 
of  the  State  of  Illinois,  for  the  use  of  the  ]iarties  inter- 
ested, in  such  penalty  and  with  such  securities  as  the  court 
may,  in  the  decree  or  order  appointing  the  same,  require. 
In  all  cases  of  suits  for  or  against  such  receiver  or  the  cor- 
poration of  which  he  may  be  receiver,  writs  may  issue  in 
favor  of  such  receiver  or  corporation,  or  against  him  or  it, 
from  the  county  where  the  cause  of  action  accrued  to  the 

B— II— 26 


402     BUSINESS  ORaANIZATION  DOCUMENTS 

sheriff  of  any  county  in  this  State  for  service.  [As  amend- 
ed by  act  approved  May  22,  1877;  in  force  July  1,  1877.] 

§  26.  Foreign  corporations,  and  the  officers  and  agents 
thereof,  doing  business  in  this  State,  shall  be  subjected  to 
all  the  liabilities,  restrictions  and  duties  that  are  or  may  be 
imposed  upon  corporations  of  like  character  organized 
under  the  general  laws  of  this  State,  and  shall  have  no 
other  or  greater  powers.  And  no  foreign  or  domestic  cor- 
poration established  or  maintained  in  any  way  for  the  pe- 
cuniary profit  of  its  stockholders  or  members,  shall  purchase 
or  hold  real  estate  in  this  State  except  as  provided  for  in 
this  act. 

§  27.  The  certified  copy  of  any  articles  of  incorpora- 
tion, and  changes  thereof,  together  with  all  indorsements 
thereon,  under  the  great  seal  of  the  State  of  Illinois,  shall 
be  taken  and  received  in  all  courts  and  places  as  prima  facie 
evidence  of  the  facts  therein  stated. 

§  28.  Nothing  in  this  act  shall  be  construed  to  allow 
the  construction  or  operation  of  any  street  railroad  in  any 
city,  town  or  incorporated  village,  without  the  consent  of 
the  local  authorities  thereof. 

§  28J.  It  shall  be  unlawful  for  the  Secretary  of  State 
to  issue  a  license  for  any  person  or  persons  to  incorporate, 
under  the  name  of  any  heretofore  existing  corporation  or- 
ganized under  any  general  law  of  this  State,  until  the  ex- 
piration of  30  days  from  and  after  the  expiration  of  the  ex- 
istence of  such  corporation:  Provided,  that  the  corporation 
enjoying  such  name  shall  have  the  exclusive  privilege  of  be- 
coming incorporated  under  the  same  name  at  any  time 
within  the  said  30  days,  according  to  the  provisions  of  the 
act  to  which  this  is  an  amendment.  [Added  by  act  ap- 
proved June  16, 1887;  in  force  July  1,  1887.] 


CORPORATION  ACTS  403 

(B)— THE  PROPOSED  NEW  YORK  BUSINESS 
COMPANIES' ACT:    1900/ 

1.  Title. 

Section  1.  This  act  may  be  cited  as  the  New  York  Busi- 
ness Companies'  Act:  1900. 

§  2.  Every  corporation  organized  under  this  act  shall 
print  immediately  below  its  name  on  its  letter  heads  and 
other  business  papers  the  words  "Organized  under  the  New 
York  Business  Companies'  Act:  1900." 

2.  Powers  and  Purposes. 

§  3.  Every  corporation  organized  under  this  act  has 
power: 

1.  To  have  succession  by  its  corporate  name  for  the 
period  specified  in  its  certificate  of  incorporation. 

2.  To  have  and  use  a  common  seal,  and  to  alter  the  same 
at  pleasure. 

3.  To  sue  and  be  sued. 

4.  To  acquire  by  grant,  gift,  purchase,  device  or  bequest, 
to  hold,  use,  mortgage,  pledge  and  to  dispose  of  any  prop- 
erty, real  or  personal,  and  any  rights  or  claims  thereupon, 
therein  or  thereto,  by  any  legal  title  to  the  same  extent 
that  a  natural  person  might  or  could  do. 

5.  To  contract,  incur  obligations  and  bind  others  in  its 
favor  to  the  same  extent  and  in  the  same  manner  that  a 
natural  person  might  do. 

6.  To  appoint  such  officers  and  agents  as  its  business 
shall  require,  and  to  fix  their  compensation. 

7.  To  make  by-laws  not  inconsistent  with  law  for  the 
management  of  its  property,  the  regulation  of  its  affairs. 


♦The  New  York  Business  Companies'  Act.  lOOn,  was  drafted  by  a  com- 
mission, composed  of  men  exceptionally  well  fitted  for  the  work,  appointed  by 
Theodore  Roosevelt  soon  after  his  election  as  governor  of  New  York.  This 
act,  although  a  model  in  every  important  feature,  failed  of  passage  in  the  legis- 
lature, as  stated  in  Judge  Dill's  address  on  "Some  Phases  of  New  Jersey's 
Corporate  Policy,"  pages  321-344. 


404     BUSINESS  ORGANIZATION  DOCUMENTS 

the  transfer  of  its  stock,  and  the  calling  of  meetings  of  its 
members. 

8.  To  do  business  in  any  other  state  or  states,  in  the 
District  of  Columbia,  in  sluj  territory  or  dependency  of  the 
United  States,  or  in  any  foreign  country.  It  may  have 
one  or  more  offices  Avithin  or  without  the  State  of  New 
York,  and  may  purchase  or  otherwise  legally  acquire,  hold, 
use,  mortgage,  and  otherwise  pledge  and  convey  real  and 
personal  property  out  of  the  state  to  the  same  extent  as 
an  individual  might  do,  subject  always  to  the  laws  of  such 
state  or  territory;  provided  that  such  powers  are  included 
within  the  provisions  of  the  certificate  of  incorporation. 

9.  To  wind  up  its  affairs  voluntarily  and  dissolve  itself 
in  the  manner  hereafter  mentioned. 

§  4.  No  corporation  shall  possess  or  exercise  the  above- 
mentioned  or  any  other  corporate  powers,  except  such  inci- 
dental powers  as  shall  be  necessary  to  the  exercise  of  its 
powers  above  mentioned  unless  they  are  contained  in  the 
certificate  of  incorporation. 

§  5.  No  corporation  created  or  to  be  created  under  the 
provisions  of  this  act  shall  by  any  implication  or  construc- 
tion be  deemed  to  possess  the  power  of  carrying  on  the 
business  of  receiving  deposits  of  money  or  of  doing  a  bank- 
ing or  insurance  business;  nor  shall  any  such  corporation 
adopt  as  a  part  of  its  name  the  w^ords,  *'bank,"  "trust," 
or  ''trust  company,"  "savings,"  "investment,"  "insur- 
ance," or  "assurance,"  "loan,"  or  "syndicate." 

§  6.  Upon  executing,  recording  and  filing  a  certificate 
of  incorporation  pursuant  to  the  provisions  of  this  act, 
three  or  more  persons  may  become  a  corporation  for  any 
lawful  purpose  or  purposes,  other  than  a  moneyed  corpora- 
tion or  a  corporation  provided  for  by  the  banking,  the  in- 
surance, the  railroad  and  the  transportation  corporation 
laws.  It  shall  be  lawful  to  form  a  corporation  hereunder 
for  the  purpose  of  acting  as  a  registration  company,  which 
may  serve  as  the  registered  agent,  as  hereinafter  provided, 


CORPORATION  ACTS  405 

of  companies  organized  under  this  act,  siil)jeet  to  all  tlic 
obligations  imposed  therein. 

3.  Registered  Office  and  Agent. 

v^  7.  Every  corporation  organized  under  this  act  sliall 
have  and  keep  continuously  a  registered  oiifice  in  this  state, 
and  an  agent  in  charge  thereof.  The  name  of  the  corpo 
ration  shall  be  conspicuously  displayed  at  the  entrance  to 
such  office,  and  the  address  of  the  office  shall  be  printed 
upon  all  letter  heads  used  by  the  corporation.  This  office 
must  be  kept  open  regularly  during  ordinary  business 
hours  and  the  agent  must  be  present  to  perform  the  duties 
required. 

§  8.  In  the  registered  office  in  charge  of  its  registered 
agent  must  be  kept  the  stock  book  and  a  transfer  book  of 
the  corporation,  written  up  to  date,  open  to  the  inspec- 
tion of  all  bona  fide  stockholders,  and  ready  to  be  used  for 
the  transfer  of  stock. 

§  9.  The  registered  office  of  any  domestic  corporation 
shall  be  deemed  its  post-office  address  and  that  of  its  officers, 
directors  and  stockholders,  and  whenever  under  this  act 
notice  is  required  to  l^e  given  to  the  corporation,  its  officers, 
directors  or  stockholders  other  than  notices  of  meetings 
such  notice  sent  to  tlie  registered  office  shall  be  sufficient, 
unless  another  address  is  specially  mentioned. 

§  10.  Even'  certificate  of  incorporation  and  every  cer- 
tificate, report  or  statement  required  by  this  act  to  be  made 
to  any  officer  or  department  of  this  state,  or  required  to 
be  published,  or  required  to  be  filed  or  recorded  by  any 
corporation,  shall,  in  addition  to  the  other  matters  required 
by  law,  set  forth  the  location,  town  or  city,  street  and  num- 
ber, if  number  there  be,  of  its  registered  office  in  this  state, 
together  with  the  name  of  the  agent  therein,  upon  whom 
process  against  the  corporation  may  be  served.  No  certifi- 
cate, statement  or  report  of  companies  organized  under 
this  act  shall  be  received,  filed  or  recorded  by  any  officer 


406     BUSINESS  ORaANIZATION  DOCUMENTS 

of  this  state  or  in  any  office  in  this  state  unless  the  same 
shall  comply  with  the  foregoing. 

§  11.  The  board  of  directors  of  any  corporation  or- 
ganized under  this  act  may  change  the  location  of  the  regis- 
tered office  of  such  corporation  within  the  state  to  any 
other  place  within  this  state  by  resolution  adopted  at  a 
regular  or  special  meeting  of  such  board  by  the  votes  of 
at  least  two-thirds  of  the  members  thereof.  Upon  the 
adoption  of  a  resolution  as  aforesaid,  a  copy  thereof,  signed 
by  the  president  and  secretary  of  such  corporation,  and 
sealed  with  its  corporate  seal,  shall  be  filed  in  the  office 
of  the  secretary  of  state.  For  filing  the  said  certificate  the 
secretary  of  state  shall  charge  a  fee  of  five  dollars. 

§  12.  Any  corporation  may  have  one  or  more  transfer 
offices  within  or  without  the  State  of  New  York  and  may 
transfer  stock  therein,  provided  that  it  shall  always  keep 
its  stock  book  and  a  transfer  book  at  its  registered  office 
hereinbefore  referred  to. 

§  13.  Every  stock  transfer  made,  whether  in  the  reg- 
istered office  or  elsewhere,  shall  be  recorded  and  entered 
in  the  stock  books  of  the  said  corporation;  and  the  record 
of  such  transfers  as  are  not  made  in  the  registered  office 
shall  be  sent  by  mail  to  the  registered  office  in  the  State 
of  New  York  within  two  days  after  the  transfer  is  made. 
Upon  receipt  thereof  at  the  registered  office,  they  shall  be 
entered  upon  the  stock  books,  so  that  such  books  shall  at 
all  times  present  a  complete  record  of  the  stockholders 
with  their  addresses  other  than  the  registered  office  and 
their  holdings,  including  the  number  and  kind  of  shares 
held  by  them,  w^hich  record  shall  be  at  all  times  during 
business  hours  open  to  the  inspection  of  any  bona  fide  stock- 
holder. 

§  14.  Each  corporation  shall  upon  its  organization  ap- 
point and  name  in  its  articles  of  incorporation  an  agent 
to  be  knowra  as  its  registered  agent.  Such  agent  so  ap- 
pointed shall  sign  every  certificate  of  incorporation,  and 


CORPORATION  ACTS  407 

shall,  after  his  designation,  be  held,  to  all  intents  and  pur- 
poses, and  for  all  the  objects  specified  in  this  act,  the  agent 
of  the  company,  until  he  shall  have  resigned  and  his  resig- 
nation shall  have  been  filed  in  the  ollice  of  the  secretary 
of  state,  or  until  the  corporation  shall  have  designated 
another  agent  in  his  place  and  stead  and  filed  such  designa- 
tion in  said  office.  Such  agent  so  appointed  shall  be  either 
a  male  resident  of  the  State  of  New  York,  of  full  age,  or 
a  domestic  corporation  organized  under  and  pursuant  to 
the  terms  of  this  act,  and  duly  authorized  thereto  by  its 
certificate  of  incorporation. 

§  15.  Every  registered  agent  shall,  during  the  month 
of  April  of  each  year,  file  a  statement  as  of  the  first  of 
April,  under  oath,  with  the  secretary  of  state  of  New  York 
which  shall  specify: 

1.  The  names  of  the  corporations  for  which  he  is  the 
registered  agent. 

2.  Whether  such  corporations  have  or  have  not  made 
their  annual  report,  as  required  by  sections  one  hundred 
eight  and  one  hundred  nine  of  this  act. 

3.  AVhether  the  names  of  these  corporations  have  been 
at  all  times  displayed  before  their  registered  office  as  re- 
quired by  section  seven. 

4.  Whether  the  provisions  of  this  act  in  sections  eight 
and  thirteen,  regarding  the  keeping  and  inspection  of  stock 
and  transfer  books,  have  been  fully  complied  with. 

Such  report  shall  be  verified  by  the  agent  as  true  to 
the  best  of  his  knowledge  and  information  and  belief,  and 
shall  be  in  such  form  as  the  secretary  of  state  shall  pre- 
scribe, and  on  such  blanks  as  the  secretaiy  of  state  shall 
prescribe  and  on  such  blanks  as  the  secretaiy  of  state  may 
furnish.    No  fee  shall  be  charged  for  filing  such  report. 

§  16.  For  failure  to  file  said  statement,  the  registered 
agent  shall  be  liable  for  a  penalty  in  the  sum  of  one  lumdrcd 
dollars,  to  be  sued  for  and  recovered  by  the  Attorney-Clen- 
eral  or  other  officer  designated  by  him,  or  by  the  district 


408     BUSINESS  ORGANIZATION  DOCUMENTS 

attorney  of  the  county  in  which  the  registered  office  is  lo- 
cated. 

4.  Certificate  of  Incorporation  and  By-Laws, 

§  17.  The  certificate  of  incorporation  shall  be  signed 
in  person  by  all  the  subscribers  to  the  capital  stock  named 
therein  and  by  the  registered  agent. 

§  18.     The  certificate  of  incorporation  shall  contain: 

1.  The  name  of  the  company,  which  shall  not  be  the 
same  as  that  of  any  other  company  registered  in  this  state 
or  likel}^  to  be  misunderstood  therefor. 

2.  The  location,  to^^^l  or  city,  street  and  number,  if  there 
be  number,  of  its  registered  office  in  this  state. 

3.  The  name  of  the  agent  therein  and  in  charge  thereof 
and  upon  whom  process  against  the  corporation  may  be 
served,  in  accordance  with  the  provisions  of  this  act. 

4.  The  principal  purj^ose  or  purposes  for  which  the  com- 
pany may  be  formed,  and  such  subsidiary  purposes  and 
special  powers  in  connection  with  the  principal  purpose  or 
purposes  as  the  incorporators  may  see  fit  to  insert  therein, 
in  accordance  with  the  provisions  of  this  act. 

5.  The  amount  of  the  total  authorized  capital  stock  of 
the  corporation  Avhich  shall  not  be  less  than  one  thousand 
dollars. 

6.  The  number  of  shares  into  which  the  same  is  divided, 
and  the  par  value  of  each  share,  to  be  not  less  than  ten  dol- 
lars nor  more  than  one  thousand  dollars. 

7.  The  amount  of  capital  stock  which  is  subscribed  by 
the  incorporators,  which  shall  not  be  less  than  one  thousand 
dollars  in  all,  nor  less  than  one  share  for  any  one. 

8.  If  there  be  more  than  one  class  of  stock,  a  descrip- 
tion of  the  respective  classes  with  the  terms  upon  which 
the  respective  classes  are  created. 

9.  The  names  and  post-office  addresses  of  the  incorpo- 
rators, not  the  registered  office,  and  the  number  of  shares 


CORPORATION  ACTS  409 

siil)scril)od  l)y  each,  tojj^othcr  w  itli  llic  (l('si|rnaiion  oi'  tlic 
kind  of  shares  sul)S('ril)('d. 

10.  The  period  of  (Inraticui  of  tlie  company,  limited  or 

imliniited. 

§  19.  Tlie  eertificate  of  incorporation  may  contain  any 
provision  not  inconsistent  with  this  act,  ^vllich  the  incor- 
poratcM's  may  clioosc  to  insert  for  the  regnlation  of  the 
bnsincss  and  for  the  conduct  of  the  affairs  of  the  corpora- 
tion, and  must  contain  all  the  provisions  creatines  defin- 
uvj:,  liniitiiii?  and  ree^nhitin^  the  powers  of  the  company, 
the  directors  and  stockholders,  and  of  any  class  or  classes 
of  stockliolders,  or  any  right  or  rights  of  specific  stock- 
holders. No  provision  creating,  defining,  differentiating, 
limiting  and  regulating  the  powers  of  the  corporation,  the 
directors,  the  stockholders,  or  any  class  or  classes  of  stock- 
holders, shall  be  valid  unless  inserted  in  the  certificate  of 
incorporation  or  in  an  amendment  thereof. 

§  20.  The  certificate  of  incorporation  must  be  execut- 
ed by  natural  male  persons  who  must  be  of  full  age,  but 
without  restriction  as  to  nationality,  citizenship,  or  resi- 
dence. 

§  21.  Tlic  certificate  of  incorporation  shall  be  proved 
or  acknowledged  as  required  for  deeds  of  real  estate,  and 
filed  in  the  office  of  the  secretary  of  state.  Said  certificate 
or  a  copy  thereof  duly  certified  by  the  secretary  of  state 
shall  be  evidence  in  all  courts  and  places.  A  copy  of  the 
certificate  must  also  be  kept  in  the  registered  office  of  the 
company,  and  a  copy  must  be  furnished  by  the  registered 
agent  to  any  person  demanding  the  same  on  payment  of 
a  charge  of  not  more  than  one  dollar. 

§  22.  On  filing  the  certificate  of  incor])oration  the  in- 
corporators shall  pay  the  secretary  of  state  the  following 
fees  for  the  use  of  the  state: 

1.  Twenty  cents  on  each  one  thousand  doHars  of  capi- 
tal stock  autiiorized;  but  in  no  case  less  than  twenty-five 
dollars. 


410     BUSINESS  ORGANIZATION  DOCUMENTS 

2.  For  increase  of  capital  stock,  twenty  cents  per  one 
thousand  dollars  of  increase;  but  in  no  case  less  than  twen- 
ty dollars. 

3.  For  merger  or  consolidation  of  corporations,  twenty 
cents  for  each  thousand  dollars  authorized,  beyond  the 
total  authorized  capital  of  the  corporations  merged  or  con- 
solidated, but  in  no  case  less  than  twenty  dollars. 

4.  For  extension  or  renewal  of  corporate  existence, 
twenty-five  dollars. 

5.  For  other  certificates  or  notices  required  to  be  filed 
under  this  act,  five  dollars  each. 

§  23.  Upon  making  and  filing  the  certificate  of  incor- 
poration, and  causing  the  same  to  be  recorded  as  afore- 
said, the  persons  so  associating,  their  successors  or  assigns, 
from  the  date  of  such  filing  shall  be  and  constitute  a  body 
corporate  by  the  name  set  forth  in  said  certificate.  But 
all  corporations  organized  under  this  act  shall  be  subject 
to  dissolution  by  the  legislature  at  pleasure,  to  the  repeal 
or  qualification  of  their  charter  by  amendment  of  this  act, 
or  otherwise,  by  act  of  the  legislature  of  the  State  of  New 
York. 

§  24.  It  shall  be  lawful  for  the  incorporators  of  any 
company,  before  the  subscription  of  any  part  of  its  capital 
in  addition  to  that  subscribed  by  the  incorporators  in  the 
charter,  to  amend  its  certificate  of  incorporation  in  any  re- 
spect whatsoever,  changing  or  altering  the  same  in  accord- 
ance with  the  provisions  of  this  act  by  making  and  filing 
a  new  certificate  to  be  signed  by  all  of  the  original  incor- 
porators, provided,  that  for  the  filing  of  the  amended  cer- 
tificate an  additional  fee  of  five  dollars  is  to  be  paid  to  the 
secretary  of  state. 

§  25.  Every  corporation  organized  under  this  act  may 
change  the  nature  of  its  business,  change  its  name,  in- 
crease its  capital  stock,  decrease  its  capital  stock,  change 
the  par  value  of  the  shares  of  its  capital  stock,  change  the 
location  of  its  registered  office  in  this  state,  extend  its  cor- 


CORPORATION  ACTS  411 

porate  existence,  create  one  or  more  classes  of  preferred 
stock,  and  make  such  other  amendment,  change  or  altera- 
tion as  may  be  desired,  in  the  manner  following;  The 
board  of  directors  shall  pass  a  resolution  declaring  that 
such  change  or  alteration  is  advisa])le  and  shall  call  a  meet- 
ing of  the  stockholders  to  take  action  thereon.  The  meet- 
ing shall  be  held  upon  such  notice  as  the  certificate  of  in- 
corporation or  by-laws  provide,  and  in  the  absence  of  such 
provision,  upon  three  weeks'  notice,  given  personally  or 
by  mail.  If  two-thirds  in  interest  of  each  class  of  the 
stockholders  having  voting  powers  shall  vote  in  favor  of 
such  amendment,  change  or  alteration,  a  certificate  thereof 
shall  be  signed  by  the  president  and  secretary  under  the 
corporate  seal,  acknowledged  or  proved  as  in  the  case  of 
deeds  of  real  estate,  and  such  certificate,  together  with  the 
written  assent,  in  person  or  by  proxy,  of  two-thirds  in  in- 
terest of  each  class  of  such  stockholders,  shall  be  filed  in 
the  office  of  the  secretary  of  state,  and  upon  the  filling  of 
the  same  and  the  payment  of  the  fee  required,  the  certifi- 
cate of  incorporation  shall  be  deemed  to  be  amended  ac- 
cordingly; provided,  that  such  certificate  of  amendment, 
change  or  alteration  shall  contain  only  such  provision  as  it 
would  be  lawful  and  proper  to  insert  in  an  original  certifi- 
cate of  incorporation  made  at  the  time  of  making  such 
amendment;  and  provided  further  that  in  case  the  corpora- 
tion by  such  amendment  proposes  to  undertake  business 
which  is  not  of  the  same  general  character  as  that  provid- 
ed in  the  original  certificate,  or  creates  one  or  more  new 
classes  of  stock,  or  gives  to  certain  classes  of  stock  or  bonds 
new  privileges,  or  increases  the  amount  of  the  capital  stock, 
a  vote  of  four-fifths  of  each  class  shall  be  required  and  any 
dissenting  stockholder  may  declare  his  dissent  in  writing 
at  the  meeting  called  for  the  purpose  of  amendment,  and 
may  sell  to  the  company  and  the  company  shall  buy  his 
holdings  of  stock  at  a  valuation  appraised  in  the  manner 
provided  in  section  one  hundred  eighteen  for  dissent- 


412     BUSINESS  ORGANIZATION  DOCUMENT^ 

ing  stockholders  in  case  of  merger  or  consolidation  of  com- 
panies. If  such  dissent  is  declared  in  writing  at  the  meet- 
ing the  subsequent  proceedings  for  appraisement  and  pur- 
chase may  be  enforced  at  the  instance  of  either  party.  The 
certificate  of  the  secretary  of  state  that  such  amended  cer- 
tificate and  assent  have  been  filed  in  his  office  shall  be  tak- 
en and  accepted  as  evidence  of  such  change  or  alteration 
in  all  courts  and  places. 

§  26.  Any  company  in  this  state  or  any  foreign  cor- 
poration, whether  organized  under  special  charter  or  under 
a  general  law,  which  would  be  qualified  to  organize  under 
this  act,  may,  by  complying  with  the  procedure  in  the  fore- 
going section,  and  stating  also  the  facts,  and  giving  the 
information  necessary  to  be  contained  in  an  original  certifi- 
cate of  incorporation  under  this  act,  be  registered  and 
incorporated  under  this  act,  and  from  the  date  of  filing  said 
certificate,  this  act  shall  apply.  A  domestic  corporation 
reorganizing  under  this  act  will  be  exempt  from  payment 
of  incorporation  fees. 

§  27.  All  companies  existing  at  the  coming  into  force 
of  this  act,  and  all  companies  hereafter  organized  under 
the  present  business  corporation  laws,  unless  they  elect  to 
put  themselves  under  its  provisions  in  the  manner  pre- 
scribed in  the  preceding  sections,  shall  remain  subject  to 
the  laws  r^ating  to  them,  as  if  this  act  had  not  been  passed. 

§  28.  The  power  to  make  and  alter  by-laws  shall  be 
in  the  stockholders;  but  the  corporation  may  in  its  certifi- 
cate of  incorporation  confer  that  power  upon  the  directors. 
By-laws  made  by  the  directors  under  powers  so  conferred 
may  be  altered  or  repealed  by  the  stockholders  at  any  spe- 
cial meeting  called  for  that  purpose,  upon  due  notice,  or  at 
the  annual  meeting,  without  notice. 

§  29.  No  by-laws  adopted  by  the  board  of  directors 
regulating  the  election  of  directors  or  officers  shall  be  valid, 
unless  a  copy  thereof  shall  be  delivered  or  mailed  to  each 


CORPORATION  ACTS  413 

stockholder  of  record  at  least  thirty  days  before  such  elec- 
tion. 

§  30.  Every  stockholder  shall  be  entitled  to  receive, 
and  every  corporation  ])y  its  officers  and  board  of  directors 
shall  be  bound  to  furnish  any  stockholder  Hi)()n  I'cquest,  at 
the  expense  of  the  eorporation,  a  copy  of  the  certificate  of 
incorporation  and  of  tlie  by-laws. 

5.  Directors. 

§  31.  The  business  of  every  coi-poration  organized 
vmder  this  act  shall  be  managed  by  its  directors  who  shall 
respectively  be  bona  fide  shareholders  therein.  At  least 
one  of  the  directors  must  be  an  actual  resident  of  this  state. 

§  32.  The  directoi-s  shall  not  be  less  than  three  in  num- 
ber, but  shall  consist  of  three  or  as  many  more  as  the  incor- 
porators shall  see  fit.  They  shall  l)e  chosen  annually  by 
the  stockholders  at  the  time  provided  in  the  by-laws,  shall 
hold  office  for  one  year,  and  until  othei-s  are  chosen  and 
qualified  in  their  places,  unless  other  provision  be  made  in 
the  certificate  of  incorporation. 

§  33.  Any  corporation  organized  under  this  act  may 
classify  its  directors  in  respect  to  the  time  for  which  they 
may  hold  office,  the  several  classes,  however,  to  be  as  nearly 
as  is  numerically  possible,  equal  in  number  and  elected  for 
different  terais.    Provided, 

1.  That  no  class  shall  be  elected  for  a  period  shorter 
than  one  year  except  at  the  first  election,  for  the  first  year, 
or  for  more  than  five  years,  and 

2.  That  the  teim  of  office  of  at  least  one  class  shall  ex- 
pire each  3'ear. 

§  34.  Any  cori">oration  which  shall  have  more  than  one 
kind  of  stock,  by  making  suitable  provision  in  its  certificate 
of  incorporation,  may  confer  the  right  to  choose  the  di- 
rectoi-s  upon  the  stockholders  of  any  class  or  classes,  or 
upon  the  bondholders,  to  the  exclusion  of  others,  subject, 
in  case  this  power  is  granted  b)^  amendment,  to  the  right 


414     BUSINESS  ORGANIZATION  DOCUMENTS 

of  minority  stockholders  provided  in  section  twenty-five 
regarding  amendments  to  the  certificate  of  incorporation. 

§  35.  Every  director  shall  have  the  power  at  any  time 
to  resign  from  the  corporation,  the  acceptance  of  his  resig- 
nation not  being  necessary  to  complete  the  resignation,  pro- 
viding and  if,  within  thirty  days  after  his  resignation,  the 
corporation  shall  file  in  the  office  of  the  secretary  of  state 
and  the  registered  office  the  designation  of  a  ncAV  director 
in  his  place,  or  if  the  director  so  resigning  shall  file  a  notice 
in  the  same  places  of  the  fact  of  his  resignation.  Until 
notice  of  the  resignation  is  so  filed,  and  the  special  obliga- 
tions incurred  as  director  before  his  resignation  are  ful- 
filled, the  director  shall  in  no  wise  be  relieved  of  his  respon- 
sibility as  director. 

6.  Elections. 

§  36.  All  elections  of  directors  shall  be  by  ballot.  The 
poll  at  every  such  election  shall  be  open  between  the  hours 
of  nine  o'clock  in  the  morning  and  five  o'clock  in  the  after- 
noon, and  shall  remain  open  for  at  least  one  hour  unless  all 
the  stockholders  are  present  in  person  or  by  proxy,  and 
have  sooner  voted,  or  unless  all  the  stockholders  waive  this 
provision  in  writing. 

§  37.  Any  corporation  may,  by  making  suitable  pro- 
vision in  its  certificate  of  incorporation,  determine  what 
number  of  shares  shall  entitle  the  stockholders  to  one  or 
more  votes,  what  number  of  stockholders  shall  attend 
either  in  person  or  by  proxy,  or  what  number  of  shares  shall 
of  necessity  be  required  in  any  meeting  in  order  to  consti- 
tute a  quorum.  If  suitable  provision  be  made  in  the  certif- 
icate of  incorporation,  any  plan  of  cumulative  or  propor- 
tional voting  may  be  established;  but  unless  some  such  plan 
has  been  adopted,  the  persons  receiving  the  greatest  num- 
ber of  votes  at  an  election  shall  be  directors. 

§  38.  Every  election  shall  be  in  charge  of  two  inspect- 
ors to  be  appointed  in  the  manner  provided  by  resolution 


CORPORATION  ACTS  415 

of  the  board  of  (liiTt-tors  or  l)v  tlie  stocklioldors.  Such  in- 
spectors shall  make  their  return  in  writing  and  shall  verify 
the  same  under  oath. 

§  39.  Unless  otherwise  provided  in  the  certificate  of 
incorporation,  at  every  election  each  stockholder,  whether 
resident  or  non-resident,  shall  be  entitled  to  one  vote  in  per- 
son or  by  proxy  given  in  writing  for  each  share  of  the  cap- 
ital stock  held  by  him;  but  no  proxy  shall  be  voted  on  after 
one  year  from  its  date  or  by  any  candidate  for  election  as 
a  director.  No  stock  shall  be  voted  on  at  any  election 
which  has  been  transferred  on  the  books  of  the  coi*poratiun 
within  twenty  days  preceding  such  election;  nor  shall  any 
stock  which  has  been  issued,  whether  original  or  other- 
wise, within  twenty  days  of  the  said  election,  be  voted  upon. 

§  40.  Every  person  holding  stock  as  executor,  admin- 
istrator, guardian  or  trustee,  or  in  any  other  representative 
or  fiduciary  capacity,  may  represent  the  same  at  all  meet- 
ings of  the  corporation,  and  may  vote  thereon  as  a  stock- 
holder, and  every  person  who  shall  pledge  his  stock  as  col- 
lateral security  may,  nevertheless,  represent  the  same  at 
all  such  meetings,  and  may  vote  thereon  as  a  stockholder, 
unless  in  the  transfer  to  the  pledgee  on  the  books  of  the  cor- 
poration he  shall  have  expressly  empowered  the  pledgee  to 
vote  thereon,  in  which  case  only  the  pledgee  or  his  proxy 
may  represent  said  stock  and  vote  thereon. 

§  41.  Shares  of  its  own  stock  belonging  to  the  said 
corporation  shall  not  be  voted  upon  directly  or  indirectly, 
and  this  shall  apply  to  all  shares  of  stock  held  by  a  trustee 
for  the  benefit  of  those  owned  or  controlled  by  the  corpora- 
tion. 

§  42.  In  case  the  right  to  vote  upon  any  share  of  stock 
shall  be  questioned,  the  inspectors  of  election  shall  refer 
to  the  stock  or  transfer  books  of  the  corporation  to  ascer- 
tain who  are  the  stockholders,  and  in  case  of  a  discrepancy 
between  the  books,  the  transfer  books  shall  control  and  de- 
termine who  are  entitled  to  vote. 


416     BUSINESS  ORGANIZATION  DOCUMENTS 

§  43.  The  directors  of  every  company  organized  under 
this  act  shall  cause  the  registered  agent,  or  other  transfer 
agent  designated  by  them  as  having  charge  of  the  said 
books,  to  make,  at  least  ten  days  before  every  election  after 
the  first  election,  a  full,  true  and  complete  list,  arranged  in 
alphabetical  order,  of  all  the  stockholders  entitled  to  vote 
at  the  ensuing  election,  with  the  post-office  addresses,  not 
the  registered  office  of  the  corporation,  of  each,  and  the 
number  of  shares  of  each  kind  of  stock  held  by  each,  which 
list  shall,  at  all  times  during  the  usual  business  hours,  be 
kept  at  such  registered  office  open  to  examination  by  any 
stockholder. 

§  44.  The  board  of  directors  shall  produce  at  the  time 
and  place  of  every  election  of  directors,  such  books  and 
such  list,  there  to  remain  during  the  election.  A  copy  of 
such  list  shall  be  mailed  to  any  stockholder  within  five  da}' s 
after  his  request  is  received,  upon  pajanent  in  advance  of 
cost  of  copying  at  not  over  ten  cents  per  folio  of  one  hun- 
dred words. 

§  45.  The  neglect  or  failure  of  the  said  directors  of  a 
corporation  with  a  capital  stock  of  five  hundred  thousand 
dollars  or  upwards  to  cause  the  said  books  so  to  be  kept,  or 
to  cause  the  said  list  to  be  so  made  and  filed,  or  to  produce 
the  said  books  or  the  said  list  at  the  time  of  any  election, 
shall  render  them  ineligible  to  hold  office  as  director,  or 
any  other  office  in  the  company  for  the  period  of  one  year 
thereafter.  In  addition  to  the  penalty  above  named  for 
failure  the  sum  of  one  hundred  dollars  each  may  be  col- 
lected from  any  or  all  of  the  directors  at  the  suit  of  any 
stockholder,  for  his  o^^ti  use.  Delinquent  directors  of  cor- 
porations with  a  capital  stock  of  less  than  five  hundred 
thousand  dollars  shall  be  subject  to  the  last-named  penalty 
only. 

7.  Officers. 
§  46.     Every  corporation  organized  under  this  act  shall 


CORPORATION  ACTS  417 

have  a  president,  vice-president,  one  or  more  aiiditoi*s,  src- 
retaiy  and  treasurer,  who,  witli  the  exception  (►£  the  aiidit- 
01*8,  shall  he  chosen  hy  the  stockholders,  or  directors,  as  the 
certihcate  of  incorporation  shall  })rovide.  They  shall  hold 
their  offices  annually,  or  in  accordance  with  the  provisions 
of  this  act,  and  until  others  are  chosen  and  qualified  in 
their  stead. 

§  47.  The  president  and  vice-president  shall  he  chosen 
from  among  the  directors. 

§  48.  The  secretary  shall  be  sworn  to  the  faithful  dis- 
charge of  his  duty  and  mav,  if  the  certificate  of  incorpora- 
tion so  provides,  be  appointed  by  the  board  of  directoi^  to 
hold  office  during  the  pleasure  of  the  board. 

§  49.  The  treasurer  shall  give  a  bond  in  such  sum  and 
with  such  surety  or  sureties  as  shall  be  required  by  the  by- 
laws for  the  faithful  discharge  of  his  duty,  which  sum  shall 
not  be  less  than  one  thousand  dollars. 

§  50.  The  auditor  or  auditoi-s  shall  be  chosen  by  the 
stockholders  at  their  annual  meeting  and  no  person  or  firm 
or  corporation,  a  member,  director  or  officer  of  which  may 
be  a  dii-ector  of  the  company  to  be  audited  shall  be  eligible. 
Corporations  organized  under  this  act  with  a  capital  stock 
of  one  hundred  thousand  dollars  or  upwards,  must  select 
as  auditor  or  auditors  a  person,  fiiTu  or  corporation  duly 
qualified  and  engaged  in  the  practice  of  public  accounting 
and  auditing  in  this  state.  And  the  auditor  or  auditors  se- 
lected by  a  corporation  whose  capital  stock  amounts  in  all 
to  one  million  dollars  must  have  his  or  their  financial  re- 
sponsibility secured  by  a  bond  of  fifty  thousand  dollars  of 
some  surety  company  authorized  to  do  business  under  the 
insurance  laws  of  this  state;  and  for  a  corporation  whose 
capital  stock  is  less  than  one  million  dollars,  by  a  bond 
amounting  to  at  least  five  per  centum  of  the  capital  stock 
and  approved  by  the  shareholders.  The  above  ])rovisions 
regarding  bonds  may  be  waived  by  the  written  consent  of 
every  shareholder. 

B— 11— J7 


418     BUSINESS  ORGANIZATION  DOCUMENTS 

§  51.  The  corporation  may  also  have  such  other  of- 
ficers, agents,  or  factors,  to  be  chosen  in  the  manner  and  to 
hold  their  offices,  for  such  times  as  may  be  prescribed  in  the 
by-laws.  Corporations  with  five  hundred  thousand  dollars 
capital  stock  or  upwards  must  appoint  a  general  counsel- 
who  shall  be  counted  in  the  list  of  officers. 

§  52.  Any  stockholder  shall  be  entitled  upon  payment 
of  cost  of  copying  at  not  over  ten  cents  a  folio  of  one  hun- 
dred words  to  a  statement  at  any  time  of  all  salaries  paid 
to  any  officer  or  officers  of  the  corporation,  together  with  a 
statement  of  all  contracts  or  agreements  in  w^hich  any  of- 
ficer of  the  corporation  may  be  interested  either  as  a  con- 
tracting party  with  the  corporation  or  as  an  officer  or  stock- 
holder in  any  other  corporation  contracting  with  the  com- 
pany. 

§  53.  The  salaries  of  the  officers  shall  be  fixed  at  the 
annual  meeting  unless  the  articles  of  incorporation  provide 
otherwise.  In  case,  however,  salaries  shall  be  increased  at 
any  time  by  the  board  of  directors  under  provision  of  the 
articles  of  incorporation,  report  thereof  must  be  made  at 
the  next  annual  meeting  to  the  stockholders  and  laid  be- 
fore them  for  ratification.  Their  action  shall  be  conclusive 
in  all  particulars. 

§  54.  Any  vacancies  occurring  in  the  board  of  di- 
rectors or  in  the  office  of  president,  vice-president,  secre- 
tary or  treasurer  by  death,  resignation,  removal  or  other- 
wise, shall  be  filled  in  the  manner  provided  for  in  the  by- 
laws. In  the  absence  of  such  provision  such  vacancies  shall 
be  filled  by  the  board,  but  if  the  number  of  directors  is  in- 
creased between  the  annual  meetings,  or  by  the  directors 
themselves,  the  directorships  thus  created  are  not  vacancies 
within  the  meaning  of  this  section  but  must  be  filled  by  the 
vote  of  the  stockholders. 

§  55.  If  any  certificate  made,  or  any  public  notice  given 
by  the  officers  or  directors  of  any  corporation  in  pursuance 
of  the  provisions  of  this  act,  shall  be  false  in  any  material 


CORPORATION  ACTS  419 

representation,  all  the  ollicers  or  directors  who  shall  have 
signed  the  same,  knowinc^  it  to  be  false^  shall  he  Jointly  and 
severally  liable  for  all  the  debts  of  the  corporation  con- 
tracted while  they  were  directors  or  officers  thereof,  as  a 
penalty  enforceable  in  the  courts  of  this  state  only. 

8.  Meetings. 

§  56.  The  first  meeting  of  every  corporation  shall  be 
called  by  a  notice  signed  by  a  majority  of  the  incorpora- 
tors, designating  the  time,  the  place,  which  must  be  the 
registered  office  of  the  corporation  designated  in  the  certifi- 
cate of  incorporation,  and  the  purpose  of  such  meeting; 
which  notice  shall  be  published  at  least  two  weeks  before 
the  meeting,  in  some  newspaper  of  the  tovm.  where  the  cor- 
poration is  established,  or,  if  there  be  no  newspaper  in  the 
town  or  city,  in  the  county;  or,  such  meeting  may  be  called 
without  publication,  if  such  notice  be  mailed  to  each  of  the 
incorporators  at  least  five  days,  exclusive  of  the  day  of 
mailing,  before  the  date  of  meeting,  or  if  two  days*  notice 
be  personally  served  upon  all  the  incorporatoi-s,  or  if  all  of 
the  incorporators  shall  in  writing  waive  notice  of  the  mat- 
ters required  by  this  statute  and  fix  a  time  and  place  of  such 
meeting.    In  such  case  no  notice  shall  be  required. 

§  57.  All  meetings  of  stockholders  of  every  coi^oora- 
tion  organized  under  this  act  shall  be  held  at  its  registered 
office  in  this  state.  But  the  directors  may  hold  their  meet- 
ings, and  may  have  one  or  more  offices,  and  one  or  more 
transfer  offices  of  stock,  and  may  keep  the  books  of  the 
corporation  elsewhere  within  or  without  the  state  with  the 
exception  of  the  stock  and  transfer  books,  as  provided  in 
section  eight,  if  the  certificate  of  incorporation  so  provides. 

§  58.  At  the  regular  annual  meeting,  for  which  pro- 
vision must  be  made  in  the  certificate  of  incoq^oration  or 
in  the  by-laws,  the  shareholders'  balance  sheet  pre})ared 
and  certified  by  the  auditors  as  provided  in  title  twelv(; 
must  be  presented  to  the  shareholdei's.    If  the  directors 


420     BUSINESS  ORGANIZATION  DOCUMENTS 

or  other  officers  of  any  corporation  organized  under  this 
act  shall  fail  or  neglect  to  call  in  the  manner  provided  by 
law  the  annual  stockholders '  meeting  at  the  time  appointed 
in  the  certificate  of  incorporation  or  in  the  by-laws  and  shall 
not  hold  the  same  accordingly  thereupon,  from  the  time 
when  said  meeting  was  appointed  to  be  held  until  the  meet- 
ing shall  actually  be  held  thereafter,  all  salaries  of  all  of- 
ficers and  directors  shall  cease  and  determine,  and  it  shall 
be  unlawful  for  any  corporation  or  its  officers  or  directors  to 
pay  directly  or  indirectl}^  any  salary  or  compensation  to 
any  officer  or  director  for  services  rendered  in  the  interim. 
§  59.  At  the  annual  meeting  any  shareholder  shall  be 
entitled  to  require  from  the  company,  and  the  directors 
shall  be  bound  to  furnish  him  \\dth  a  copy  of  all  or  any 
parts  of  the  directors'  records  of  meetings.  Said  share- 
holder may  be  required  to  pay  the  cost  of  making  a  copy 
of  said  records  at  a  rate  not  to  exceed  ten  cents  for  every 
folio  of  one  hundred  words. 

9.  Stocks  and  Bonds. 

§  60.  Every  corporation  shall  have  power  to  create  two 
or  more  kinds  of  stock  of  such  classes,  with  such  designa- 
tions, preferences  and  voting  powers,  or  restrictions  or 
qualifications  thereof,  as  shall  be  stated  in  the  certificate 
of  incorporation.  The  power  to  increase  or  to  decrease  the 
stock,  as  in  this  act  elsewhere  provided,  shall  apply  to  all 
classes  of  stock.  Such  preferred  or  classified  shares  may, 
if  desired,  be  made  subject  to  redemption,  at  not  less  than 
par,  at  a  time  and  place  to  be  fixed  in  the  certificate  of  in- 
corporation. No  corporation  shall  create  preferred  or  dif- 
ferentiating shares  of  stock,  except  the  same  be  provided 
for  in  the  said  certificate  of  incorporation.  The  liability  of 
holdere  of  all  classes  of  stock  is  limited  to  the  payment  of 
the  subscription  for  the  stock  itself  at  par  value  as  pro- 
vided in  the  act. 

§  61.    By  making  suitable  provision  in  its  certificate 


CORPORATION  ACTS  421 

of  incorporation,  tlio  corporation  may  issue  bonds  and 
dobonturos,  wliethor  socnrod  ])y  mortG^n^i^o  or  otbonviso,  and 
may  ^ixe  to  the  holdei-s  of  such  bonds  or  de])onturcs  votin,i^ 
powers,  under  such  circumstances  and  in  such  manner  as 
the  certificate  of  incorporation  shall  provide,  and  such  vot- 
ing power  may  be  equal  and  equivalent  to  those  of  the 
stockholders. 

§  62.  The  word  ''stockholder"  wherever  used  in  lliis 
act  shall  be  construed  to  include  all  bondholders  who  pur- 
suant to  the  terms  of  this  act  are  entitled  to  vote. 

§  63.  Every  stockholder  shall  be  entitled  to  receive  a 
certificate  of  stock  signed  by  two  officers  of  the  cori)oration. 
Ever}^  certificate  of  stock  and  every  bond  shall  specify  the 
amount  of  capital  stock  authorized  to  be  issued  by  said 
corporation,  the  amount  of  each  class,  if  there  is  more  than 
one  class,  also  the  amount  of  each  class  issued  for  casli 
and  for  other  consideration,  the  par  value  of  each  share, 
and  the  location  of  the  registered  office  of  the  company,  and 
shall  disclose  fully  and  fairly  any  qualification  or  restric- 
tion contained  in  the  certificate  of  incorporation  affecting 
the  right  of  the  stockholder,  or,  in  case  of  l)onds,  of  the 
bondholder,  by  way  of  voting  power  or  otherwise. 

§  64.  Any  corporation  or  individual  countersigning 
the  said  stock  or  bonds,  either  as  transfer  agent  or  as  regis- 
trar of  the  stock,  shall  be  deemed  to  guarantee  the  legality 
and  regularity  in  all  particulars  of  the  transfer,  unless  tiu^ 
countersign  itself  shall  give  notice  in  clearly  legible  char- 
acters that  said  countersigning  agent  limits  or  refuses  re- 
sponsibility. 

§  65.  The  shares  of  stock  in  every  corporation  shall 
be  personal  property,  shall  be  transferable  on  the  l)ooks  of 
the  company  in  such  manner  and  under  such  regulations  as 
the  l)y-laws  provide,  and  whenever  any  transfer  of  shares 
shall  be  made  for  collateral  security  and  not  absolutely,  it 
shall  be  so  expressed  in  the  entry  of  transfer;  but  the  power 


422     BUSINESS  ORGANIZATION  DOCUMENTS 

to  vote  upon  sucli  stock  shall  remain  in  the  owner  thereof 
and  not  in  the  pledgee,  unless  expressly  so  stated. 

§  66.  Every  share  of  stock  shall  be  deemed  to  be  issued 
and  shall  be  held  subject  to  the  payment  of  its  par  value  in 
cash,  unless  before  the  issuance  of  said  stock  a  contract 
shall  be  filed  in  the  registered  office  of  the  company  which 
shall  truly  and  fully  disclose  in  detail  the  consideration 
for  which  the  said  stock  is  issued,  whether  the  same  be  for 
property,  services  or  otherwise. 

§  67.  In  case  any  stock  is  issued  for  consideration 
other  than  cash,  every  share  of  stock  shall  have  stamped 
across  its  face  a  statement  that  stock  has  been  issued  in 
accordance  with  a  contract  filed  in  the  registered  office  and 
the  proportion  of  shares  of  each  class  so  issued. 

§  68.  Every  such  contract  so  filed  in  the  registered 
office  shall  truly  and  fully  disclose  the  consideration  for 
which  said  stock  is  issued,  the  parties  to  whom  such  stock 
is  issued  and  the  real  parties  in  interest.  Such  contract 
shall  be  open  during  regular  office  hours  to  the  inspection 
of  any  one  and  a  copy  thereof  shall  be  furnished  by  the 
registered  agent  of  the  corporation  to  any  one  requesting 
it  and  advancing  the  cost  of  making  a  copy  thereof,  which 
cost  shall  not  exceed  the  sum  of  ten  cents  per  folio  of  one 
hundred  words.  In  every  annual  report  made  by  the  com- 
pany, the  amount  of  capital  paid  in  cash  and  the  amount 
otherwise  issued  in  pursuance  of  the  provisions  of  the  fore- 
going sections  shall  be  stated  together  with  the  specific 
amounts  issued  during  the  two  years  next  preceding. 

§  69.  The  judgment  of  the  board  of  directors  as  to  the 
value  of  the  consideration  other  than  cash  thus  received  by 
the  company  shall  be  final  and  conclusive  upon  all  parties, 
provided,  that  all  the  provisions  of  this  act  relating  thereto 
be  fully  carried  out,  and  that  the  contracts  fairly  and  fully 
disclose  the  real  nature  of  the  bargain  thus  recorded. 

§  70.  Where  the  whole  capital  of  the  corporation  shall 
not  have  been  paid  in,  and  the  capital  paid  shall  be  insuffi- 


CORPORATION  ACTS  423 

cient  to  satisfy  its  debts  and  o])lii^^atioiis,  each  stofklioldcr 
shall  be  bound  to  pay  on  each  share  held  by  him  the  sum 
necessary  to  complete  the  amount  of  such  share,  as  fixed 
by  the  charter  of  the  corporation,  or  sucli  ])ioi tort  ion  of 
that  sum  as  shall  be  required  to  satisfy  such  deljts  and 
obli2:ations. 

§  71.  No  loan  of  money  shall  be  made  to  any  stock- 
holder to  enable  such  stockholder  to  withdraw  in  effect  any 
part  of  the  money  paid  in  by  him  on  his  stock;  and  if  any 
such  loan  be  made,  the  officers  who  make  it  or  assent  to  it 
shall  be  jointly  and  severally  liable  to  the  extent  of  such 
loan  and  interest  for  all  the  debts  of  the  corporation  until 
the  repayment  with  interest  of  the  sum  so  loaned. 

§  72.  The  directors  of  every  corporation  may,  from 
time  to  time,  make  assessments  upon  the  shares  of  stock 
subscribed  for,  not  exceeding,  on  the  whole,  the  par  value 
thereof;  and  the  sums  so  assessed  shall  be  paid  to  the  treas- 
urer at  such  times  and  by  such  installments  as  the  directors 
shall  direct,  said  directors  having  given  thirty  days'  notice 
of  the  assessment  and  of  the  time  and  place  of  payment 
either  personally  or  by  mail  or  by  pu])lication  in  a  news- 
paper published  in  the  county  where  the  corporation  is 
established. 

§  73.  If  the  o^^T^er  of  any  shares  shall  neglect  to  pay 
any  sum  assessed  thereon  for  thirty  days  after  the  time 
appointed  for  payment,  the  treasurer,  when  ordered  by  the 
board  of  directors,  shall  soil,  at  public  auction,  such  num- 
bers of  the  shares  of  the  delinquent  owner  as  will  pay  all 
assessments  then  due  from  him,  with  interest  and  all  nec- 
essary incidental  charges,  and  shall  transfer  the  shares  sold 
to  the  purchaser,  who  shall  be  entitled  to  a  certificate  there- 
for. 

§  74.  The  treasurer  shall  give  notice  of  the  time  and 
place  appointed  for  the  sale  and  of  the  sum  due  on  each 
share  by  advertising  the  same  three  weeks  successively, 
once  in  each  week,  before  the  sale,  in  some  newspaper  i^ub- 


424     BUSINESS  ORaANIZATION  DOCUMENTS 

lished  in  the  county  where  the  corporation  is  established, 
and  by  mailing  a  notice  thereof  to  the  delinquent  stock- 
holder at  his  post-office  address,  not  the  registered  office 
of  the  company. 

§  75.  The  president  and  secretary,  or  treasurer,  upon 
the  payment  of  the  amount  of  capital  subscribed  in  the  cer- 
tificate of  incorporation,  whether  up  to  the  amount  author- 
ized by  its  certificate  or  in  addition  thereto,  if  increased  in 
the  manner  provided  by  this  act,  shall  make  a  certificate 
stating,  in  addition  to  the  requirements  of  section  eighteen 
of  this  act,  the  amount  of  capital  so  paid,  whether  paid  in 
cash  or  otherwise;  the  total  amount  of  capital,  if  any,  pre- 
viously paid  in  and  reported,  with  the  date  of  such  report, 
and  also  stating  with  regard  to  any  such  additional  stock 
thus  issued  for  consideration  otherwise  than  cash,  the  date 
of  filing  the  contract  determining  such  issue.  This  certifi- 
cate shall  be  signed  and  sworn  to  by  the  president  and  sec- 
retary or  treasurer,  and  the  directors  shall,  within  ten 
days,  cause  the  certificate  to  be  filed  in  the  office  of  the  sec- 
retary of  state  and  a  copy  thereof  in  the  registered  office  of 
the  company.  In  case  of  their  failure  so  to  do,  the  direct- 
ors of  the  company  whose  terms  shall  expire  at  the  next 
annual  election  shall  each  and  all  be  disqualified  for  a  period 
of  one  year  from  being  elected  or  serving  as  directors  or 
officers  of  the  corporation. 

§  76.  But  no  director  shall  be  thus  disqualified  if  be- 
fore the  time  of  the  annual  meeting  he  shall  file  a  state- 
ment in  the  office  of  the  secretary  of  state  and  a  copy  thereof 
in  the  registered  office  of  the  company,  stating  that  he  has 
endeavored  to  have  such  certificate  properly  made  and 
filed,  but  that  the  officers  have  neglected  to  make  and  file 
the  same,  and  shall  make  such  certificate  giving  the  facts 
so  far  as  they  are  within  his  knowledge  or  are  obtainable 
from  sources  of  infoiTnation  open  to  him,  and  shall  verify 
the  certificate  to  be  true  to  the  best  of  his  knowledge,  infor- 
mation and  belief. 


CORPORATION  ACTS  425 

§  77.  If  any  of  tlio  said  officers  or  dirortors  shall  nog- 
loct  or  refuse  to  perfonn  the  duties  required  of  them  in 
section  seventy-five  for  ten  days  after  being  requested  in 
writing  so  to  do  by  any  creditor  or  stockholder  of  the  cor- 
poration, the  directors  so  neglecting  or  refusing  shall  be 
jointlv  or  severally  liable  for  all  the  debts  of  the  com])any 
contracted  before  the  filing  of  such  certificate  and  until  the 
same  shall  be  filed. 

§  78.  Any  corporation,  if  proper  provision  is  made  in 
the  certificate  of  corporation,  shall  have  the  power  to  pur- 
chase, hold,  sell,  assign,  transfer,  mortgage,  pledge  or  other- 
wise dispose  of  the  stock  of  securities  of  other  corporations, 
and,  while  the  owner  thereof,  to  vote  upon  them  to  the  same 
extent  as  natural  persons  might  or  could  do. 

§  79.  Every  corporation  shall  have  the  power  to  pur- 
chase or  otherwise  acquire  its  own  capital  stock,  but  only 
out  of  its  sur2:)lus  earnings  or  in  payment  or  satisfaction  of 
any  debt  due  the  company  to  such  extent  and  manner  and 
upon  such  terms  as  the  board  of  directors  by  two-thirds 
vote  shall  detennine,  and  to  re-issue  the  said  stock  so  ac- 
quired. Any  such  purchase  or  re-issue  of  stock  shall  be 
noted  in  the  annual  report. 

§  80.  Any  domestic  corporation  organized  under  this 
act  may  increase  or  reduce  its  capital  stock  in  the  manner 
herein  provided.  If  increased,  the  holders  of  the  additional 
stock  issued  shall  be  subject  to  the  same  liabilities  with 
respect  thereto  as  are  provided  herein  in  relation  to  the 
original  capital;  if  reduced,  the  amount  of  its  debts  and 
liabilities  shall  not  exceed  the  amount  of  its  reduced  capital. 
The  owner  of  any  stock  shall  not  be  relieved  fn^m  any 
liability  existing  prior  to  the  reduction  of  the  capital  stock 
of  any  stock  corporation. 

§  81.  Every  such  increase  or  reduction  must  be  au- 
thorized by  a  vote  of  the  stockholders  in  accordance  with 
the  provisions  of  section  twenty-five  of  this  act. 

§  82.    Such  increase  or  reduction   shall   not    become 


426     BUSINESS  ORGANIZATION  DOCUMENTS 

valid  until  entered  in  the  amended  certificate  of  incorpora- 
tion, and  filed  in  the  office  of  the  secretary  of  state  and  the 
registered  office  of  the  company. 

10.  Dividends. 

§  83.  No  corporation  shall  make  dividends,  except 
from  the  surplus  or  net  profits  arising  from  its  business, 
nor  divide,  withdraw,  or  in  any  way  pay  to  the  stockhold- 
ers, or  any  of  them,  any  part  of  its  capital  stock,  or  reduce 
its  capital  stock,  except  according  to  this  act;  and  in  case 
of  any  violation  of  the  provisions  of  this  section,  the  direct- 
ors under  whose  administration  the  same  may  happen  shall 
be  jointly  and  severally  liable,  at  any  time  mthin  six  years 
after  paying  such  dividend,  to  the  corporation  and  to  its 
creditors,  in  the  event  of  its  dissolution  or  insolvency,  to 
the  full  amount  of  the  dividend  made  or  capital  stock  so 
divided,  withdrawn,  paid  out  or  reduced,  with  interest  on 
the  same  from  the  time  such  liability  accrued;  provided, 
that  any  director,  who  may  have  been  absent  when  the 
same  was  done,  or  who  may  have  dissented  from  the  act  or 
resolution  by  which  the  same  was  done,  ma}^  exonerate  him- 
self from  such  liability  by  causing  his  dissent  to  be  entered 
at  large  on  the  minutes  of  the  directors,  at  the  time  the 
same  was  done,  or  forthvdth  after  he  shall  have  notice  of 
the  same,  and  by  causing  a  true  copy  of  said  dissent  to  be 
filed  in  the  registered  office  of  the  corporation  and  to  be 
published,  within  two  weeks  after  the  same  shall  have  been 
so  entered,  in  a  newspaper  published  in  the  county  where 
the  corporation  has  its  main  place  of  business. 

§  84.  Dividends  may  be  paid  semi-annually  or  quarter- 
ly on  preferred  stock,  and,  thereafter,  a  like  amount  on  the 
common  stock,  if  the  directors  so  decide  and  the  certificate 
of  incorporation  permits,  Avithout  waiting  for  the  end  of 
the  fiscal  year.  Such  semi-annual  or  quarterly  dividend 
on  common  stock  shall  not  exceed  that  paid  on  preferred 
stock;  but  at  the  end  of  the  fiscal  year  the  full  amount  of 


CORPORATION  ACTS  427 

the  surplus  caruini^s,  after  payment  of  dividends  on  pre- 
ferred stock,  and  of  otlior  ])i-ior  obliterations,  may  be  dis- 
tributed among  the  holders  of  the  comnion  stock. 

11.  Promotion. 

§  85.  Every  prospectus,  announcement  or  advertise- 
ment of  whatever  kind,  howsoever  publislied,  printed,  cir- 
culated or  issued  after  the  conunencement  of  this  act,  pro- 
vided the  same  is  published  or  issued  with  a  view  of  ob- 
taining subscriptions  for  shares  or  bonds  in  a  company  or- 
ganized under  this  act,  or  directly  or  indirectly  inviting  per- 
sons to  subscribe  for  shares  or  bonds  in  a  company  so  or- 
ganized shall  specify: 

1.  The  names  and  addresses  of  the  promoters  and  di- 
rectors and  the  number  of  shares  held  or  agreed  to  be  taken 
up  by  them  respectively  and  whether  wholly  paid  up  or 
partly  paid  up  and  the  consideration,  remuneration  or  re- 
ward, if  any,  to  the  incoi-porators,  directors,  promoters, 
underwriters  or  others  respectively  for  becoming  incor- 
porators, directors,  promoters,  underwriters  or  members 
of  the  company; 

2.  The  date  and  the  names  of  the  parties  to  any  con- 
tract directly  or  indirectly  relating  to  the  company  or  to 
the  promotion  thereof  entered  into  by  the  company  or  the 
promoters,  directors,  or  trustees  thereof  or  any  person  act- 
ing as  a  trustee  or  agent  for  or  on  behalf  of  them  or  any  of 
them  and  whether  such  contract  be  entered  into  with  the 
promoters  or  directors  or  any  of  them  or  any  other  per- 
son whomsoever  within  two  years  before  the  issue  of  such 
prospectus  whether  subject  to  adoption  by  the  directors  of 
the  company  or  otherwise,  and  shall  also  state  a  place  where 
such  contract  if  in  writing  may  be  inspected,  which  place 
must  be  the  registered  office  of  the  company,  if  that  is  yet 
organized,  provided  that  this  subdivision  of  this  section 
shall  not  apply  to  a  contract  entered  into  by  the  company 
after  its  incorporation  in  the  ordinary  course  of  the  business 


428     BUSINESS  ORGANIZATION  DOCUMENTS 

carried  on  by  the  company,  unless  stock  or  bonds  are  issued 
or  to  be  issued  as  a  consideration; 

3.  The  contents  of  the  articles  of  incorporation,  if  any, 
with  the  names  and  addresses  of  the  subscribers  thereto 
and  the  number  of  shares  subscribed  for  by  them  respec- 
tively, together  with  the  number  of  shares  fixed  as  the  qual- 
ification of  a  director; 

4.  The  consideration  paid  or  to  be  paid,  and  if  so,  how 
and  when,  for  any  property  purchased  or  acquired  or  to  be 
purchased  or  acquired  by  the  company  and  from  whom  and 
when  purchased  or  acquired,  with  a  brief  description  of  the 
nature  of  the  property  and  its  location  if  physical  property, 
and  whether  any  part  and  if  so,  how  much  of  such  consider- 
ation money  is  for  good- will; 

5.  Tlie  amount,  if  any,  payable  as  commission,  bonus 
or  reward  for  subscribing  or  agreeing  to  subscribe  or  pro- 
curing or  agreeing  to  procure  subscriptions  for  or  for  under- 
writing or  guaranteeing  the  sale  of  any  shares  in  the  com- 
pany or  the  rate  of  any  such  commission; 

6.  The  minimum  subscription  upon  which  the  directors 
will  allot  the  shares  subscribed,  and  begin  business; 

7.  The  minimum  amount  payable  on  application  and 
allotment  on  each  share; 

8.  The  number  and  amount  of  shares  issued  or  agreed 
to  be  issued  as  fully  or  partly  paid  up  otherwise  than  in 
money,  and  in  the  latter  case  the  extent  to  which  they  are 
so  paid  up,  and  in  either  case  the  consideration  for  which 
and  the  person  or  persons  to  whom  such  shares  have  been 
issued  or  are  proposed  or  intended  to  be  issued; 

9.  The  names  and  addresses  of  the  vendors  of  any 
property  purchased  or  acquired  by  the  company  or  to  be  so 
purchased  or  acquired,  which  is  to  be  paid  for  wholly  or 
partly  out  of  the  proceeds  of  the  issue  offered  for  subscrip- 
tion by  the  prospectus  or  the  purchase  or  acquisition  of 
which  has  not  been  completed  at  the  date  of  publication  of 
the  prospectus  and  where  there  is  more  than  one  vendor 


CORPORATION  ACTS  429 

or  the  company  is  a  subpurchaser,  i\\v  amount  payable  in 
money  or  shares  to  each  vendor; 

10.  The  amount  or  estimated  amount  of  preliminary 
expenses; 

11.  The  amount  paid  or  intended  to  be  paid  in  cash  or 
shares  or  otherwise,  to  or  for  any  promoter  and  the  consid- 
eration therefor; 

12.  The  amount  intended  to  be  reserved  for  working 
capital; 

13.  The  proposed  application  of  the  proceeds  of  the 
issue  of  the  shares;  and 

14.  The  names  and  addresses  of  the  auditors  or  in- 
tended auditors,  if  any,  of  the  company. 

§  86.  A  prospectus  which  does  not  comply  with  the 
preceding  section  shall  be  deemed  to  be  fraudulent  on  the 
part  of  the  following  persons  knowingly  issuing  the  same, 
that  is  to  say: 

1.  Every  person  who  is  a  director  or  manager  of  the 
company  at  the  time  of  the  issue  of  the  prospectus;  and 

2.  Every  person  who  having  authorized  such  naming  of 
him  is  named  in  the  prospectus  as  a  director  of  the  company 
or  as  having  agreed  to  become  a  director  of  the  company 
either  immediately  or  after  an  interval  of  time,  and 

3.  Every  promoter  of  the  company. 

§  87.  Every  person  taking  shares  on  the  faith  of  such 
prospectus  unless  he  had  actual  notice  of  the  particulars 
omitted  from  the  prospectus  shall,  in  addition  to  any  other 
remedy  he  may  have,  be  entitled  to  sue  for  rescission  of  his 
contract  to  take  shares. 

§  88.  In  the  event  of  non-compliance  with  any  of  the 
requirements  of  this  act  with  respect  to  a  prosj^ectus,  any 
person  aggrieved  shall  be  entitled  to  compensation  from 
any  person  knowingly  issuing  the  same,  and  on  the  part  of 
whom  the  prospectus  is  by  vii*tue  of  the  provisions  of  this 
section  deemed  to  be  fraudulent  unless  such  last-mentioned 
person  proves  that — 


430     BUSINESS  ORGANIZATION  DOCUMENTS 

1.  As  regards  any  matter  not  disclosed  he  was  not  cog- 
nizant thereof,  and  could  not  with  reasonable  diligence 
have  discovered  it;  or 

2.  The  non-compliance  arose  from  an  honest  mistake 
of  fact  on  his  part ;  or 

3.  The  person  aggrieved  had  actual  notice  of  the  mat- 
ter not  disclosed. 

§  89.  For  the  purposes  of  this  section  every  person 
shall  be  deemed  to  be  a  vendor  who  has  entered  into  any 
contract  absolute  or  conditional  for  the  sale  or  purchase  or 
for  any  option  of  purchase  of  any  property  to  be  purchased 
or  acquired  by  the  company  in  any  case  where 

1.  The  purchase  money  is  not  fully  paid  at  the  date  of 
publication  of  the  prospectus;  or 

2.  The  purchase  money  is  to  be  paid  or  satisfied  wholly 
or  in  part  out  of  the  proceeds  of  the  issue  offered  for  sub- 
scription by  the  prospectus ;  or 

3.  The  contract  depends  for  its  fulfillment  on  such 
issue. 

§  90.  Where  any  of  the  property  to  be  purchased  or 
acquired  by  the  company  is  to  be  taken  on  lease,  this  sec- 
tion shall  apply  as  if  the  expression  "vendor"  included  the 
lessor,  and  the  expression  *' purchase  money"  included  the 
consideration  for  the  lease,  and  the  expression  ''sub-pur- 
chaser" included  a  sub-lessee. 

§  91.  This  section  shall  not  apply  to  a  circular  or  notice 
issued  to  and  imdting  only  existing  members  of  a  company 
to  subscribe  for  further  shares,  but,  subject  as  aforesaid, 
this  section  shall  apply  to  any  prospectus  whether  issued  on 
or  with  reference  to  the  formation  of  a  company  or  sub- 
sequently; provided  that 

1.  The  requirements  as  to  the  certificate  of  incorpora- 
tion and  the  qualification  of  directors,  the  names  and  ad- 
dresses of  directors  and  the  shares  held  or  to  be  taken  by 
them,  and  the  amount  or  estimated  amount  of  preliminary 
expenses  shall  not  apply  in  the  case  of  a  prospectus  pub- 


CORPORATION  ACTS  431 

lislicd  more  than  one  year  after  the  formation  of  the  com- 
pany; and 

2.  In  the  case  of  a  prospectus  published  more  than  one 
year  after  the  foiTnation  of  a  company,  the  o])lijTation  to 
disclose  all  material  contracts  and  facts  shall  be  limited  to 
a  period  of  one  year  immediately  preceding  the  publica- 
tion of  the  prospectus. 

§  92.  For  the  purpose  of  this  act  every  contract  and 
fact  is  material  which  would  influence  the  JTidgment  of  a 
prudent  iuA^estor  in  determining  whether  he  would  sub- 
scribe for  the  shares  offered  by  the  prospectus. 

§  93.  Any  condition  requiring  an  applicant  for  shares 
to  waive,  and  any  agreement  to  waive,  due  compliance  with 
this  act  or  purporting  to  affect  him  with  notice  of  any  doc- 
ument or  matter  not  specifically  referred  to  in  the  prospec- 
tus shall  be  void. 

§  94.  Every  promoter  is  in  a  fiduciary  relation  towards 
a  company  which  he  is  engaged  in  promoting,  and  conse- 
quently 

1.  A  promoter  may  not  sell  or  let  his  own  property,  or 
property  in  which  he  has  an  interest,  to  the  company,  and 
may  not  be  interested  in  any  contract  with  the  company, 
unless  at  a  general  meeting  of  the  shareholdei*s  of  the  com- 
pany before  the  completion  of  the  purchase,  lease  or  con- 
tract a  full  and  fair  disclosure  is  made  that  he  is  the  vendor 
or  lessor  of  or  has  an  interest  in  the  property  or  in  the  con- 
tract, and  of  the  nature  and  amount  of  that  interest; 

2.  Any  such  contract  as  aforesaid  with  respect  to 
which  such  disclosure  is  not  made  shall  be  voidable  at  the 
option  of  the  company; 

3.  A  promoter  may  not  retain  for  his  ovm  use  any  prof- 
it or  remuneration,  whether  in  money,  shares,  or  otlierwise, 
arising  out  of  or  received  by  liim  in  connection  with  tlie  pro- 
motion of  the  company  or  in  consideration  of  services  ren- 
dered by  him  in  the  course  of  such  promotion,  unless  at  a 
general  meeting  of  the  company  full  and  fair  disclosure  has 


432     BUSINESS  ORGANIZATION  DOCUMENTS 

been  made  of  the  nature  and  amount  of  that  profit  or  re- 
muneration, and  the  company  has  by  formal  resolution  as- 
sented thereto  after  such  disclosure;  and, 

4.  Every  promoter  shall  be  liable  to  account  to  the 
company  for  the  amount  or  value  of  any  secret  profit  or  re- 
muneration and  to  repay  the  same  to  the  company  with 
interest  as  the  court  may  direct. 

§  95.  Where  a  person  would,  by  his  conduct  or  deal- 
ings in  the  promotion  of  any  company,  or  otherwise,  have 
incurred  any  liability,  he  shall  not  be  discharged  from  such 
liability  by  reason  only  of  his  having  acted  as  agent  or  on 
behalf  of  any  person  or  company  in  respect  of  such  promo- 
tion. 

12.  Balance  Sheet. 

§  96.  Every  company  and  the  directors  and  managers 
thereof — 

1.  Shall  cause  to  be  kept  proper  books  of  account  in 
which  shall  be  kept  full,  true  and  complete  accounts  of  the 
affairs  and  transactions  of  the  company,  and 

2.  Shall  once  at  least  in  each  year  cause  the  accounts 
of  the  company  to  be  balanced  and  a  balance  sheet  in  this 
act  referred  to  as  the  shareholders'  balance  sheet  to  be  pre- 
pared, which  balance  sheet  after  being  duly  audited  shall 
be  laid  before  the  members  of  the  company  in  general  meet- 
ing; and 

3.  Shall  cause  a  copy  of  such  shareholders'  balance 
sheet  so  audited  to  be  sent  to  the  registered  address  of 
every  member  of  the  company  at  least  seven  days  before 
the  meeting  at  which  it  is  to  be  laid  before  the  members  of 
the  company  and  a  copy  to  be  deposited  at  the  registered  of- 
fice of  the  company  for  the  inspection  of  the  members  of  the 
company  during  a  period  of  at  least  seven  days  before  that 
meeting,  and  every  shareholder  in  the  company  or  any  per- 
son acting  in  his  behalf  shall  be  entitled  to  other  copies 
thereof  on  payment  of  twenty-five  cents  each. 


CORPORATION  ACTS  433 

5  97.  The  shareholders'  biUaucc  sheet  shall  ])e  in  sucli 
form  as  is  directed  by  the  certificate  of  incori)oration  or 
the  by-laws  or  by  a  resolution  of  the  company  and  shall 
show  in  every  case — 

1.  The  amount  of  share  capital  authorized,  the  amount 
issued,  and  the  amount  paid  up  thereon,  distin^^iishin^'  the 
amount  of  share  capital  paid  up  in  money  and  the  amount 
paid  otherwise  than  in  money,  with  statement  of  nature 
of  the  consideration  and  the  arrears  of  calls  due,  and  the 
specific  amounts  issued  during  the  two  years  next  pre- 
ceding; 

2.  The  amount  of  debts  due  by  the  company,  specify- 
ing the  security  if  any,  allocated  for  each  debt  and  distin- 
guishing the  amount  of  mortgages,  debentures  and  floating 
charges  against  the  general  assets  of  the  company,  the 
amount  of  the  resen-e  fund,  if  any,  and  the  amount  of  any 
contingent  liabilities; 

3.  The  amount  of  all  current  assets,  after  making  a 
proper  deduction  for  de])ts  considered  to  be  ])ad  or  doubt- 
ful; any  debts  due  from  directors  or  other  officers  to  be 
separately  stated; 

4.  Whether  the  assets  other  than  debts  due  to  the  com- 
pany are  taken  at  cost  price  or  by  valuation,  or  on  what 
other  basis  they  are  reckoned  and  whether  any  and  if  so 
what  amount  of  percentage  has  been  written  off  and  what 
other  provision,  if  any,  has  been  made  for  depreciation; 

5.  The  gross  amount  of  the  year's  earnings,  the  deduc- 
tions made  from  the  same  for  fixed  charges  of  interest  and 
taxes  and  the  surplus,  if  any,  available  for  dividends; 

6.  The  amount  by  which  the  gross  value  of  the  assets 
of  the  company  has  been  increased  since  the  last  balance 
sheet  in  consequence  of  any  increase  in  the  valuation  of 
real  or  personal  property  belonging  to  the  company; 

7.  The  amount  of  property,  if  any,  for  which  shares 
were  issued,  which  has  been  sold  since  the  last  report  with 
a  full  disclosure  of  the  consideration  therefor  in  details, 

B— II— J8 


434     BUSINESS  ORaANIZATION  DOCUMENTS 

the  parties  to  the  contract  and  the  real  parties  in  interest; 

§  98.  The  shareholders'  balance  sheet  shall  be  accom- 
panied by  a  certificate  signed  by  two  or  more  of  the  di- 
rectors on  behalf  of  the  board  stating  that  in  their  opinion 
the  balance  sheet  is  drawn  up  so  as  to  exhibit  a  correct 
view  of  the  state  of  the  company's  affairs  and  that  in  their 
opinion  the  statement  is  correct; 

§  99.  A  copy  of  the  balance  sheet  shall  be  sent  to  each 
director  at  least  ten  days  before  the  annual  meeting  and 
unless  he  formally  at  or  before  the  meeting  makes  state- 
ment to  the  contrary,  he  shall  be  held  to  have  also  signed 
the  report; 

13.    Auditors. 

§  100.     The  auditors  of  every  company: 

1.  Shall  use  reasonable  diligence  wdth  the  view  of  as- 
certaining that  the  books  of  the  company  have  been  prop- 
erly kept  and  record  correctly  the  affairs  and  transac- 
tions of  the  company; 

2.  Shall  examine  the  shareholders'  balance  sheet  and 
any  accounts  presented  to  the  members  of  the  company, 
and  shall  report  in  writing  to  the  members  of  the  company 
that  the  balance  sheet  and  accounts  have  been  dvavm  up  in 
accordance  with  the  provisions  of  the  New  York  Companies' 
Act,  and  when  taken  together  wdth  any  explanations  at- 
tached thereto,  present  a  correct  view  of  the  state  of  the 
company's  affairs;  or  if  the  auditors  are  unable  to  make 
such  a  report  they  shall  report  in  writing  in  what  respects 
the  balance  sheet  and  accounts  fail  to  comply  with  these 
requirements,  and  shall  sign  a  certificate  at  the  foot  of  the 
balance  sheet  stating  whether  or  not  all  their  requisitions 
as  auditors,  including  their  requisitions  vdth  regard  to  the 
private  balance  sheet  hereinafter  mentioned  have  been 
complied  with;  and 

3.     Shall  report  in  wanting  to  the  members  all  material 
information  which  thev  have  observed  or  have  become  ae- 


CORPORATION  ACTS  435 

quainted  with  with  regard  to  the  books,  accounts,  securities, 
vouchers,  papers,  writings  and  documents  examined  by 
them,  and  for  this  purpose  they  sliall  at  all  times  have  ac- 
cess to  all  the  books,  accounts  and  records  of  the  company 
and  to  the  minute  book  and  shall  be  empowered  to  require 
from  the  directors  and  other  officers  such  information  and 
explanation  as  may  be  necessary  for  the  performance  of 
their  duties. 

§  101.  If  the  auditors  or  any  one  of  them  think  there 
is  just  cause  to  disapprove  of  any  part  of  the  said  accounts 
presented  to  the  members  of  the  company,  they  or  any  one 
of  them  may  disallow  any  part  of  the  said  accounts  so  dis- 
approved of  and  shall  report  their  or  his  disapproval  in 
writing  on  the  accounts  and  balance  sheet. 

§  102.  Every  such  reix)rt  and  balance  sheet  shall  be 
read  before  the  company  in  general  meeting. 

§  103.  Any  auditor  who  shall  willfully  certify  that  any 
false  or  fraudulent  balance  sheet  or  account  is  correct,  shall 
be  civilly  responsible  to  any  party  injured. 

§  104.  The  auditors  of  every  company  before  making 
a  report  pursuant  to  the  last  preceding  section  shall  re- 
quire, and  the  directors  and  president  of  the  company  shall 
without  unnecessary  delay  supply  to  the  audit(n's,*a  bal- 
ance sheet,  in  this  act  referred  to  as  the  private  balance 
sheet,  giving  the  details  on  which  the  stockholders'  balance 
sheet  is  founded  and  showing  amongst  other  things  the 
amount  of  deductions,  if  any,  for  debts  considered  to  be 
bad  or  doubtful. 

§  105.  The  private  balance  sheet  mast  be  signed  b^^ 
the  president  and  by  at  least  two  of  the  directors  of  the 
company  when  there  are  not  more  than  three  directoi-s,  and 
by  three  at  least  when  there  are  more  than  three  directors. 

§  106.  The  auditors  may  recjuin'  tlic  directors  and 
president  of  the  company  to  supply  in  writing,  signed  as 
hereinbefore  provided,  any  furthci-  details  or  infonnation 
affecting  the  balance  sheet  or  any  particular  item  com- 


436     BUSINESS  ORGANIZATION  DOCUMENTS 

prised  therein,  and  shall  sign  a  certificate  at  the  foot  of  the 
private  balance  sheet  stating  whether  or  not  all  their  req- 
uisitions as  auditors  have  been  complied  with. 

§  107.  The  private  balance  sheet  shall  not  be  issued  to 
the  members  of  the  company,  but  shall  together  with  all 
such  further  details  and  infoimation  as  aforesaid  be  kept 
by  the  directors  as  part  of  the  records  of  the  company. 

14.  Annual  Report. 

§  108.  Every  corporation  organized  under  this  act 
shall  annually  file  in  the  office  of  the  secretary  of  state  for 
use  of  the  comptroller  and  other  state  officials  acting  in 
their  official  capacity,  but  not  for  public  inspection,  and  also 
in  the  registered  office  of  the  company,  a  report,  which  said 
report  shall  be  at  all  times  open  to  the  inspection  of  the 
stockholders,  upon  request,  and  a  copy  of  such  report  shall 
be  furnished  to  any  stockholder  by  the  corporation  upon 
the  pre-payment  of  a  reasonable  charge  for  making  the 
same,  which  charge  shall  not  exceed  the  sum  of  ten  cents 
per  folio  of  one  hundred  words. 

§  109.  Said  report  shall  be  filed  within  three  months 
after  the  first  of  January  in  each  year;  shall  be  authenti- 
cated by  the  signatures  of  the  president  and  one  other  of- 
ficer of  the  company,  or  by  any  two  directors  and  shall 
contain: 

1.  The  name  of  the  corporation. 

2.  The  location,  town  or  city,  with  street  and  number, 
if  any  there  be,  of  its  registered  office,  with  the  name  of  the 
registered  agent. 

3.  The  names  of  all  the  directors  and  officers  of  the 
company  and  the  date  of  the  expiration  of  their  terms  of 
office. 

4.  The  post-office  address  of  each,  not  the  registered  of- 
fice of  the  company. 

5.  The  character  of  business  carried  on  by  the  com- 
pany. 


CORPORATION  ACTS  437 

6.  Tlio  location  of  any  and  all  transfer  oiTices  within 
and  outside  the  state. 

7.  Tlie  last  shareholders'  halanee  sheet. 

8.  The  day  appointed  for  the  next  annual  nieetinc^  of 
the  stockholders  for  the  election  of  directors. 

§  110.  In  case  any  corporation  shall  fail  to  comply 
with  the  provisions  of  this  act  regarding  the  annual  report, 
the  corporation  shall  forfeit  to  the  state  three  hundred 
dollars,  to  be  recovered  with  costs  in  an  action  of  debt,  to 
be  prosecuted  by  the  Attorney-General,  whose  duty  it  shall 
be  to  prosecute  all  such  actions  whenever  it  shall  appear 
that  this  section  has  been  violated. 

§  111.  If  such  report  be  not  so  made  and  filed  before 
the  time  appointed  for  the  holding  of  the  next  annual  elec- 
tion by  the  stockholders,  all  of  the  directors  of  any  such 
domestic  corporation  in  office  during  the  default  shall  at 
the  time  ajopointed  for  the  next  election,  and  for  a  period 
of  one  year  thereafter,  be  thereby  rendered  ineliirible  for 
election  or  appointment  to  any  office  in  the  company  as  di- 
rectors or  otherwise. 

§  112.  No  director  shall  be  thus  disqualified  for  the 
failure  to  make  and  file  such  report  if  he  shall  file  with  the 
secretary  of  state  within  thirty  days  after  the  first  day  of 
April  a  certificate  stating  that  he  has  endeavored  to  have 
such  report  made  and  filed,  but  the  officers  have  neglected 
to  make  and  file  the  same,  and  shall  repoi*t  the  items  re- 
quired to  be  stated  in  such  annual  re})oi-t  so  far  as  they  are 
within  his  knowledge,  or  are  ol)taiiiable  from  sources  of 
Such  information  open  to  him,  verified  by  him  to  be  true  to 
the  best  of  his  knowledge,  information  and  belief. 

§  113.  The  secretary  of  state  shall  upon  a])plication 
furnish  blanks  in  proper  fonn  and  shall  safely  keep  in  his 
office  all  such  statements,  and  issue  to  the  corporations 
filing  the  same  his  certificate  therefor. 


438     BUSINESS  ORGANIZATION  DOCUMENTS 

15.  Merger. 

§  114.  Any  two  or  more  corporations  organized  or  to 
be  organized  under  this  act  for  the  purpose  of  canying  on 
any  kind  of  business  may  merge  or  consolidate  into  a  single 
corporation,  which  may  be  either  one  of  said  merging  or 
consolidating  corporations,  or  a  new  corporation  to  be 
fomied  by  means  of  such  merger  and  consolidation;  but  the 
provisions  of  this  act  relative  to  merger  and  consolidation 
shall  not  apply  to  any  company  organized  under  the  in- 
surance, banking  or  transportation  laws. 

§  115.  The  consolidation  or  merger  shall  be  made 
under  the  conditions,  provisions,  restrictions,  and  with  the 
powers  hereinafter  mentioned: 

1.  The  directors  of  the  several  corporations  proposing 
to  merge  or  consolidate  may  enter  into  a  joint  agreement 
under  the  corporate  seals  of  the  respective  corporations, 
for  the  merger  or  consolidation  of  said  corporations,  and 
prescribing  the  terms  and  conditions  thereof,  the  mode  of 
carrjdng  the  same  into  effect,  the  name  of  the  new  corpora- 
tion, if  one  shall  be  so  formed  or  created,  or  of  the  consoli- 
dated corporation,  as  the  case  may  be;  the  number,  names 
and  places  of  residence  of  the  first  directors  and  officers  of 
such  new  or  consolidated  corporation  who  shall  hold  their 
offices  until  their  successors  be  chosen  or  appointed,  either 
according  to  law  or  according  to  the  by-laws  of  the  said 
corporation;  the  number  of  shares  of  the  capital  stock, 
whether  common  or  preferred,  and  the  amount  or  par  value 
of  each  share  of  such  new  or  consolidated  corporation;  and 
the  manner  of  converting  the  capital  stock  of  each  of  said 
merging  or  consolidating  corporations  into  the  stock  or  obli- 
gations of  such  new  or  consolidated  corporation,  and  in 
case  of  the  creation  of  a  new  corporation,  how  and  when  the 
directors  and  officers  shall  be  chosen  or  appointed;  together 
with  all  such  other  provisions  and  details  as  such  first-men- 
tioned directors  shall  deem  necessary  to  perfect  the  merger 


CORPORATION  ACTS  439 

or  consolidation  of  said  oorporatioii,  or  as  aro  required  fur 
the  formation  of  any  new  corporation  under  this  act. 

2.  The  agreement  shall  be  submitted  to  the  stockhold- 
ers of  each  of  said  mevii:inc^  or  consolidating^  cor])* (rations, 
separately,  at  a  meetinf^  thereof,  to  be  called  for  the  pur- 
pose of  taking  the  same  into  consideration;  and  twenty 
days'  notice  of  the  time,  place  and  object  of  such  meeting 
shall  be  mailed  to  the  last-known  post-office  address  of  each 
of  such  stockholders;  and  at  the  said  meotinji^s  of  stock- 
holders the  said  agreement  of  such  directors  shall  be  con- 
sidered, and  a  vote  of  the  stockholders  of  each  corpora- 
tion by  ballot  shall  be  taken  separately,  for  the  adoption  or 
rejection  of  the  same,  each  share  of  stock  entitling  the 
holder  thereof  to  one  vote,  and  said  ballots  shall  be  cast  in 
person  or  by  proxy;  and  if  the  votes  of  the  holders  of  two- 
thirds  of  all  the  capital  stock  of  each  of  the  said  merging 
or  consolidating  corporations  shall  be  for  the  adoption  of 
said  agreement,  that  fact  shall  be  certified  thereon  by  the 
secretaiy  of  each  of  the  respective  corporations,  under  the 
seal  thereof,  and  the  agreement,  so  adopted  and  so  certified, 
shall  be  filed  in  the  office  of  the  secretary  of  state,  and  shall 
from  thence  be  deemed  and  taken  to  be  the  agreement  and 
act  of  merger  or  consolidation  of  the  said  corporations,  and 
a  copy  of  said  agreement  and  act  of  merger  or  consolidation, 
duly  certified  by  the  secretary  of  state  under  the  seal  there- 
of, shall  be  evidence  of  the  existence  of  such  new  or  con- 
solidated corporation.  Copies  of  said  agreement  and  act 
of  merger  shall  be  filed  also  in  the  registered  office  of  the 
consolidated  coi'poration. 

§  116.  Upon  making  and  perfecting  the  said  agree- 
ment and  act  of  merger  or  consolidation,  and  filing  the  same 
in  the  office  of  the  secretary  of  state,  the  several  corpora- 
tions shall  be  one  corporation,  by  the  name  provided  in  said 
agi'eement  in  case  a  new  corporation  shall  be  created  there- 
by, or  by  the  name  of  the  consolidated  corporation  into 
which  said  other  contracting  corporation  or  corporations 


440     BUSINESS  ORGANIZATION  DOCUMENTS 

shall  be  so  merged  or  consolidated,  as  the  case  may  be,  and 
possessing  all  the  rights,  privileges,  powers  and  fran- 
chises, as  well  of  a  public  as  of  a  private  nature,  and  being 
subject  to  all  the  restrictions,  disabilities  and  duties  of  each 
of  such  corporations  so  merged  or  consolidated,  except  as 
altered  by  the  provisions  of  this  act. 

§  117.  Upon  the  consummation  of  said  act  of  merger 
or  consolidation,  all  the  rights,  privileges,  powers  and  fran- 
chises of  each  of  said  corporations,  and  all  property,  real, 
personal  and  mixed,  and  all  debts  due  on  w^hatever  ac- 
count, as  w^ell  for  stock  subscriptions  as  all  other  things 
in  action  or  belonging  to  each  of  such  corporations,  shall 
be  vested  in  the  consolidated  corporation;  and  all  prop- 
erty, rights,  privileges,  powers  and  franchises,  and  all  and 
every  other  interest  shall  be  thereafter  as  effectually  the 
property  of  the  consolidated  corporation  as  they  were  of 
the  several  and  respective  former  corporations,  and  the 
title  to  any  real  estate,  whether  by  deed  or  otherwise,  un- 
der the  laws  of  this  state,  vested  in  either  of  such  corpora- 
tions, shall  not  revert  or  be  in  any  way  impaired  by  reason 
of  this  act;  provided,  that  all  rights  of  creditors  and  all 
liens  upon  the  property  of  either  of  said  former  corpora- 
tions shall  be  preserved  unimpaired,  and  the  respective 
former  corporations  may  be  deemed  to  continue  in  ex- 
istence, in  order  to  preserve  the  same;  and  all  debts, 
liabilities,  and  duties  of  either  of  said  former  corporations 
shall  thenceforth  attach  to  said  consolidated  corporation, 
and  may  be  enforced  against  it  to  the  same  extent  as  if 
said  debts,  liabilities  and  duties  had  been  incurred  or  con- 
tracted by  it. 

§  118.  If  of  any  of  the  corporations  so  authorized  to 
merge  or  consolidate  any  stockholder  not  voting  in  favor 
of  such  agreement  shall  dissent  therefrom  and  shall  refuse 
or  neglect  to  convert  his  stock  into  the  stock  of  such  con- 
solidated corporation,  or  to  dispose  thereof  in  the  manner 
and  on  the  terms  specified  in  such  agreement,  such  dis- 


CORPORATION  ACTS  441 

sentin^  stoekholdor  or  snoli  consolidated  corporation  may, 
at  any  time  within  thirty  days  after  the  adoption  and  filing,' 
of  the  as^reement  of  consolidation,  a])ply  by  petition  to  tlif 
supreme  court  in  the  county  in  which  the  rej]jistered  office 
of  the  corporation  whose  stockholders  shall  so  dissent  or 
neglect,  was  or  is  located,  on  reasonable  notice  to  be  pre- 
scribed by  said  couii;  to  said  consolidated  corporation,  or 
to  such  dissenting-  stockholder,  as  the  case  may  be,  for  the 
appointment  of  three  disinterested  appraisers  to  appraise 
the  full  market  value  of  his  stock,  without  regard  to  an}^ 
depreciation  or  appreciation  thereof  in  consequence  of  the 
said  merger  or  consolidation,  and  whose  award,  or  that  of 
a  majority  of  them,  when  confinned  by  the  said  court, 
shall  be  final-  and  conclusive  on  all  parties,  and  said  con- 
solidated corporation  shall  pay  to  such  stockholder  in  cash 
the  value  of  his  stock  as  aforesaid;  and  on  receiving  such 
])ayment,  or  on  a  tender  thereof,  or  in  case  of  any  legal 
disability  or  absence  from  the  state,  on  the  payment  of 
such  award  into  said  court,  said  stockholder  shall  trans- 
fer his  stock  to  the  said  consolidated  corporation  to  be  dis- 
posed of  by  the  directors  thereof,  or  to  be  retained  for  the 
benefit  of  the  remaining  stockholders;  and  in  case  the  said 
award  is  not  so  paid  within  thirty  days  from  the  filing  of 
said  award  and  confinnation  by  said  court,  and  notice 
thereof  to  be  given  in  the  manner  aforesaid  unto  said  stock- 
holder or  said  consolidated  corporation,  the  amount  of  th(,' 
award  shall  be  a  judgment  against  said  corporation,  and 
may  be  collected  as  other  judgments  in  said  court  are  by 
law  collectible. 

§  119.  When  two  or  more  corporations  are  merged  or 
consolidated  the  consolidated  corporation  shall  have  power 
and  authority  to  issue  bonds  or  other  obligations,  nego- 
tiable or  otherwise,  and  with  or  without  coupons  or  inter- 
est certificates  thereto  attached,  to  an  amount  sufficient 
with  its  capital  stock  to  provide  for  all  the  payments  it  will 
be  required  to  make  or  obligations  it  will  be  required  to 


442     BUSINESS  ORGANIZATION  DOCUMENTS 

assume,  in  order  to  effect  such  merger  or  consolidation;  to 
secure  the  payment  of  which  bonds  or  obligations  it  shall 
be  lawful  to  mortgage  its  corporate  franchises,  rights, 
privileges  and  property,  real,  personal  and  mixed;  pro- 
vided, such  bonds  shall  not  bear  a  greater  rate  of  interest 
than  six  per  centum  per  annum;  the  consolidated  corpora- 
tion may  purchase,  acquire,  hold  and  dispose  of  the  stocks 
of  other  corporations  of  this  state  or  elsewhere,  and  exer- 
cise in  respect  thereto  all  the  powers  of  stockholders  there- 
of, and  may  issue  capital  stock,  either  common  or  pre- 
ferred, or  both,  to  such  an  amount  as  may  be  necessary, 
to  the  stockholders  of  such  merging  or  consolidating  cor- 
porations in  exchange  or  payment  for  their  original  shares, 
in  the  manner  and  on  the  terms  specified  in  the  agreement 
of  merger  or  consolidation;  which  may  fix  the  amount  and 
provide  for  the  issue  of  preferred  stock  based  on  the  prop- 
erty or  stock  of  the  merging  or  consolidating  corporations 
conveyed  to  the  consolidated  corporation,  as  well  as  upon 
money  capital  paid  in;  but  all  the  provisions  of  this  act  af- 
fecting single  corporations  regarding  filing  of  contracts  in 
accordance  with  which  stock  is  issued,  making  of  reports 
and  all  other  particulars  shall  apply  to  a  corporation  formed 
by  merger  or  consolidation. 

16.  Dissolution. 

§  120.  The  incorporators  named  in  any  certificate  of 
incorporation,  before  the  paj^ment  of  any  part  of  the  capi- 
tal, and  before  beginning  the  business  for  which  the  cor- 
poration was  created,  may  surrender  all  their  corporate 
rights  and  franchises,  by  filing  in  the  office  of  the  secretary 
of  state  a  certificate,  verified  by  oath,  that  no  part  of  the 
capital  has  been  paid,  that  such  business  has  not  been  be- 
gun, and  that  they  surrender  all  rights  and  franchises. 
Thereupon  the  said  corporation  shall  be  dissolved. 

§  121.  Wlienever  in  the  judgment  of  two-thirds  of 
the  board  of  directors,  it  shall  be  deemed  advisable  and 


CORPORATION  ACTS  443 

most  for  the  benefit  of  such  corporation  that  it  should  be 
dissolved,  the  board  within  ten  days  after  the  adoption  of  a 
resolution  to  that  effect  ])y  two-thirds  of  the  whole  board 
at  any  meeting  called  for  that  purpose,  of  which  meetinf^ 
every  director  shall  have  received  at  least  three  days' 
notice,  shall  cause  notice  of  the  adoption  of  such  resolu- 
tion to  be  mailed  to  each  stockholder  residing  in  the  United 
States,  and  also  beginning  within  said  ten  days  cause  a  like 
notice  to  be  published  in  a  newspaper  published  in  the 
county  wherein  the  corj^oration  shall  have  its  principal  of- 
fice, at  least  four  weeks  successively,  once  a  week  next  pre- 
ceding the  time  aj^pointed  for  the  same,  of  a  meeting  of  the 
stockholders  to  be  held  at  the  office  of  the  corporation,  to 
take  action  upon  the  resolutions  so  adopted  by  the  board  of 
directors,  which  meeting  shall  be  held  between  the  hours 
of  ten  o'clock  in  the  forenoon  and  three  o'clock  in  the  after- 
noon of  the  day  so  named,  and  wiiich  meeting  may,  on  the 
day  so  appointed,  by  consent  of  a  majority  in  interest  of 
the  stockholders  present,  be  adjourned  from  time  to  time 
for  not  less  than  eight  days  at  any  one  time,  of  which  ad- 
journed meeting  notice  by  advertisement  in  said  newspaper 
shall  be  given;  and  if  at  any  such  meeting  two-thirds  in 
interest  of  all  the  stockholders  shall  consent  that  a  dissolu- 
tion shall  take  place  and  signify  their  consent  in  writing, 
such  consent,  together  with  a  list  of  the  names  and  resi- 
dences of  the  directors  and  officers,  certified  ])y  the  presi- 
dent and  the  secretary  or  treasurer,  shall  be  filed  in  the  of- 
fice of  the  secretary  of  state,  who  upon  being  satisfied  by 
due  proof  that  the  requirements  aforesaid  have  been  com- 
plied with,  shall  issue  a  certificate  that  such  consent  has 
been  filed,  and  the  board  of  directors  shall  cause  such  certif- 
icate to  be  pul)lished  four  weeks  successively,  at  least  once 
a  week,  in  a  newspaper  pul)lished  in  said  county;  and  upon 
filing  in  the  office  of  the  secretary  of  state  of  an  affidavit 
that  said  certificate  has  been  so  published,  the  corporation 
shall  be  dissolved  and  the  board  shall  proceed  to  settle  up 


444     BUSINESS  ORGANIZATION  DOCUMENTS 

and  adjust  its  business  and  affairs;  until  all  the  debts  of  the 
corporation  are  paid  the  members  of  the  board  are  to  be  held 
responsible  for  the  proper  management  of  its  affairs,  as  if 
no  provision  had  been  made  for  dissolution;  whenever  all 
the  stockholders  shall  consent  in  writing  to  a  dissolution, 
no  meeting  or  notice  thereof  shall  be  necessary,  but  on  fil- 
ing said  consent  in  the  ofSce  of  the  secretary  of  state  he 
shall  forthwith  issue  a  certificate  of  dissolution,  which  shall 
be  published  as  above  provided. 

§  122.  All  corporations,  whether  they  expire  by  their 
own  limitation  or  be  annulled  by  the  legislature  or  other- 
wise dissolved,  shall  be  continued  bodies  corporate  for  the 
purpose  of  prosecuting  and  defending  suits  by  or  against 
them,  and  of  enabling  them  to  settle  and  close  their  af- 
fairs, to  dispose  of  and  convey  their  property  and  to  divide 
their  capital,  but  not  for  the  purpose  of  continuing  the 
business  for  which  they  were  established. 

17.  Repeal:    Act  in  Force. 

§  123.  Nothing  in  this  act  shall  be  construed  to  repeal 
any  of  the  provisions  of  the  existing  laws  of  this  state  re- 
garding monopoly  or  the  formation  of  monopolies. 

§  124.    This  act  shall  take  effect  immediately. 


IV.  CHARTERS. 

(A)— CERTIFICATE  OF  INCORPORATION  OF  THE 
MARSTON  MANUFACTURING   COMPANY.* 

Wc,  the  undersigned,  all  being  of  full  age  and  two- 
thirds  being  citizens  of  the  United  States,  and  one  of  us 
a  resident  of  the  State  of  New  York  for  the  purpose  of 
fomiing  a  Corporation  under  the  Business  Corporations 
Law  of  the  State  of  New  York,  do  hereby  certify  and  set 
forth: 

First — The  name  of  said  Corporation  shall  be 
^'Marston  Manufacturing  Company." 

Second — The  purposes  for  which  said  Corporation  is 
formed  are  as  follows: 

1.  To  buy,  sell,  manufacture  and  generally  deal  in 
all  manner  of  tools,  machinery,  devices,  appliances  and 
supplies  used  in  the  cooper's  trade. 

2.  To  lease,  buy,  sell,  use  and  hold  all  such  prop- 
erty, real  or  personal,  as  may  be  necessary  or  conven- 
ient in  connection  with  the  said  business. 

3.  To  do  any  or  all  things  set  forth  in  this  certificate 
as  objects,  purposes,  powers  or  otherwise,  to  the  same 
extent  and  as  fully  as  natural  persons  might  do,  and  in 
any  part  of  the  world. 

Tliird— The  amount  of  Capital  Stock  of  said  Corpora- 
tion shall  be  Fifty  Thousand  (-$50,000)  Dollars. 

Fourth — Tlie  number  of  shares  composing  said  capital 
stock  shall  be  Five  Hundred  (500)  Shares  of  the  par  value 
of  One  Hundred  ($100)  Dollai^  each,  and  the  amount  of 
capital  with  which  said  Corporation  will  begin  business 
is  Five  Hundred  ($500)  Dollars. 

Fifth — Tlie  principal  business  office  of  said  Corporation 


♦From  Conyngton's  Manual  of  Corporate  Management 


446     BUSINESS  ORGANIZATION  DOCUMENTS 

shall  be  in  the  Borough  of  Manhattan,  in  the  City,  County; 
and  State  of  New  York. 

Sixth — The  duration  of  said  Corporation  shall  be  per- 
petual. 

Seventh— The  number  of  directors  of  said  Corporation 

shall  be  three. 

Eighth — The  names  and  post-office  addresses  of  the  di- 
rectors of  said  Corporation  for  the  first  year  are  as  fol- 
lows: 

Names.  Addresses. 

Morris  P.  Marston  No.  165  Grand  Ave.,  Brooklyn,  N.  Y. 
John  Adams  No.  30  Broad  St.,  New  York  City. 

Henry  Cornell  Little  Falls,  New  Jersey. 

Ninth — The  names  and  post-office  addresses  of  the  sub- 
scribers to  this  certificate,  and  the  number  of  shares  of 
stock  which  each  agrees  to  take  in  said  Corporation,  are 
as  follows : 

Names.  Addresses.  Shares. 

Morris  P.  Marston  No.  165  Grand  Ave.,  Brooklyn,  N.  Y.  25 
John  Adams  No.  30  Broad  St.,  New  York  City        10 

Henry  Cornell         Little  Falls,  New  Jersey.  10 

William  B.  Ames     Singac,  New  Jersey.  5 

Tenth— Pursuant  to  Section  40  of  the  Stock  Corpora- 
tion Law,  as  amended,  this  Corporation  shall  have  power 
to  purchase,  acquire,  hold  and  dispose  of  the  stocks,  bonds, 
and  other  evidences  of  indebtedness  of  any  corporation,  do- 
mestic or  foreign,  and  issue  in  exchange  therefor  its  stock, 
bonds  or  other  obligations. 

In  Witness  Whereof,  we  have  made  and  signed  this  cer- 
tificate in  duplicate  this  fourteenth  day  of  January, 
one  thousand  nine  hundred  and  three. 


State  of  New  York 
County  of  New  York 


Morris  P.  Marston. 
ss.:  John  Adams. 

Henry  Cornell. 
William  B.  Ames. 


CHARTER  OF  THE  STEEL  CORPORATION    447 

Personally  appeared  before  me  this  14th  da}-  of  Janu- 
ary, 1903,  Morris  P.  Marston,  John  Adams,  Ilciiry  rornell 
and  William  B.  Ames,  to  me  personally  known  to  be  the 
])ersons  described  in  and  who  executed  the  foregoinp^  cer- 
tificate, and  severally  acknowled^ced  that  they  executed 
the  same  for  the  purposes  therein  set  forth. 

8eth  Lawson 
(Notarial)  Notary  Public  for  New  York  Pounty. 

(    Seal     ) 

(B)— CHARTER  OF  THE  UNITED  STATES  STEEL 

CORPORATION. 


Certificate  of  Amendment  of  Original  Certificate  of 
Incorporation. 


United  States  Steel  Corporation,  a  corporation  of  the 
State  of  New  Jersey,  and  the  President  and  the  Secretary 
of  said  Company,  do  hereby  certify  as  follows : 

1.  (Here  follows  the  location  of  the  principal  office  in 
New  Jersey,  and  the  name  of  the  agent  therein  and  in 
charge  thereof.) 

2.  The  total  authorized  capital  stock  of  said  corpora- 
tion, as  set  forth  in  its  original  certificate  of  incorporatimi, 
is  $3,000,  divided  into  30  shares  of  the  par  value  of  $100 
each,  of  which  15  shares  of  the  aggregate  par  value  of  $1,500 
are  to  be  preferred  stock,  and  15  shares  of  the  aggregate  par 
value  of  $1,500  are  to  be  common  stock.  Such  total  author- 
ized capital  stock,  consisting  of  15  shares  of  the  preferred 
stock  and  15  shares  of  the  common  stock,  of  the  aggregate 
par  value  of  $3,000,  was  subscribed  for  by  the  incorpora- 
tors as  set  forth  in  the  said  original  certificate  of  incorpora- 
tion. 

3.  The  Board  of  Directors  of  said  corporation,  at  a 
meeting  of  said  Board  duly  held,  passed  a  resolution  de- 
claring that  the  changes  and  amendments  hereinafter  set 
forth  are  advisable,  and  calling  a  meeting  of  the  stock- 
holders to  take  action  thereon. 


448     BUSINESS  ORGANIZATION  DOCUMENTS 

4.  Such  meeting  of  the  stockholders  was  thereupon 
duly  held  pursuant  to  such  call  of  the  Board  of  Directors, 
upon  notice  given  to  each  stockholder  as  provided  in  the 
by-laws.  At  said  meeting  all  of  the  incorporators  and 
stockholders  of  said  corporation  were  personally  present, 
and  more  than  two-thirds  in  interest  of  each  class  of  the 
stockholders  having  voting  powers — namely,  all  of  the  in- 
corporators and  all  of  the  stockholders  of  said  corporation 
— voted  in  favor  of  such  changes  and  amendments,  which 
were  accordingly  adopted.  Such  changes  and  amend- 
ments are  as  follows: 

A.  That  Article  IV  of  the  Certificate  of  Incorporation 
of  said  company  be  amended  so  as  to  read  as  follows: 

IV.  The  total  authorized  capital  stock  of  the  corpora- 
tion is  eleven'  hundred  million  dollars  ($1,100,000,000),  di- 
vided into  eleven  million  shares  of  the  par  value  of  one 
hundred  dollars  each.  Of  such  total  authorized  capital 
stock,  five  million  five  hundred  thousand  shares,  amount- 
ing to  five  hundred  and  fifty  million  dollars,  shall  be  pre- 
ferred stock,  and  five  million  five  hundred  thousand  shares, 
amounting  to  five  hundred  and  fifty  million  doUars,  shall  be 
common  stock. 

From  time  to  time  the  preferred  stock  and  the  com- 
mon stock  may  be  increased  according  to  laAv,  and  may  be 
issued  in  such  amounts  and  proportions  as  shall  be  deter- 
mined by  the  Board  of  Directors  and  as  may  be  permitted 
by  law. 

The  holders  of  the  preferred  stock  shall  be  entitled  to 
receive,  when  and  as  declared,  from  the  surplus  or  net 
profits  of  the  corporation  yearly  dividends  at  the  rate  of 
seven  per  centum  per  annum,  and  no  more,  payable  quar- 
terly on  dates  to  be  fixed  by  the  by-laws.  The  dividends 
on  the  preferred  stock  shall  be  cumulative,  and  shall  be 
payable  before  any  dividend  on  the  common  stock  shall  l)e 
paid  or  set  apart;  so  that  if  in  any  year  dividends  amount- 
ing to  seven  per  cent  shall  not  have  been  paid  thereon,  the 


CHARTER  OF  THE  STEEL  CORPORATION    449 

deficiency  shall  be  paya])le  before  ;my  dividends  shall  be 
paid  u])on  or  set  a])art  for  the  common  stock. 

Whenever  all  cnnmlative  dividends  on  the  preferred 
stock  for  all  previons  years  shall  have  been  declared,  and 
shall  have  become  payal)le,  .-iiul  the  accrned  qnarterly  in- 
stallments for  the  cnrrent  year  shall  have  been  declared, 
and  the  company  shall  have  paid  such  cumulative  dividends 
for  previous  years  and  such  accrued  quarterly  installments, 
or  shall  have  set  aside  from  its  surplus  or  net  profits  a  sum 
sufficient  for  the  payment  thereof,  the  Board  of  Directors 
may  declare  dividends  on  the  common  stock,  payable  then 
or  thereafter,  out  of  any  remainini,^  surplus  or  net  profits. 

In  the  event  of  any  liquidation  or  dissolution  or  wind- 
ing up  (whether  voluntary  or  involuntary)  of  the  corpora- 
tion, the  holders  of  the  preferred  stock  shall  be  entitled 
to  be  paid  in  full  lioth  the  par  amount  of  their  shares  and 
the  unpaid  dividends  accrued  thereon  before  any  amount 
shall  be  paid  to  the  holders  of  the  common  stock;  and  after 
the  payment  to  the  holders  of  the  preferred  stock  of  its  par 
value  and  the  unpaid  accrued  dividends  thereon,  the  re- 
maininc^  assets  and  funds  shall  be  divided  and  paid  to  the 
holders  of  the  conunon  stock  according  to  their  respective 
shares. 

And  that  the  capital  stock  of  said  Company  be  increased 
accordin.rrly  to  $1,100,000,000,  divided  into  11,000,000 
shares  of  the  par  value  of  $100  each,  of  which  amount  5,500,- 
000  shares  amounting  to  $550,000,000  shall  be  prefeiTed 
stock,  with  th(>  i-ights  and  preferences  aforesaid,  and  5,- 
500,000  shares  amounting  to  $550,000,000  shall  be  conmiou 
stock. 

B.  That  the  fifth  paragraph  of  Article  YTL  of  the  said 
certificate  of  incorporation  be  amended  so  as  to  read  as 
follows : 

Unless  authorized  by  votes  given  in  person  or  by  proxy 
by  stockholdei-s  holding  at  least  two-tliii"ds  of  the  capital 
stock  of  the  corporation,  which  is  rciH'cscntcd  and  voted 

B— II— 23 


450     BUSINESS  ORGANIZATION  DOCUMENTS 

upon  in  person  or  by  proxy  at  a  meeting  specially  called  for 
that  purpose,  or  at  an  annual  meeting,  the  Board  of  Di- 
rectors shall  not  mortgage  or  pledge  any  of  its  real  prop- 
erty, or  any  shares  of  the  capital  stock  of  any  other  cor- 
poration; but  this  prohibition  shall  not  be  construed  to 
apply, to  the  execution  of  any  purchase-money  mortgage 
or  any  other  purchase-money  lien. 

As  authorized  by  the  Act  of  the  Legislature  of  the  State 
of  New  Jersey,  passed  March  22, 1901,  amending  the  seven- 
teenth section  of  the  Act  Concerning  Corporations  (Re- 
vision of  1896),  any  action  which  theretofore  required  the 
consent  of  the  holders  of  two-thirds  of  the  stock,  at  any 
meeting  after  notice  to  them  given,  or  required  their  con- 
sent in  writing  to  be  filed,  may  be  taken  upon  the  consent 
of,  and  the  consent  given  and  filed  by,  the  holders  of  two- 
thirds  of  the  stock  of  each  class  represented  at  such  meet- 
ing in  person  or  by  proxy. 

C.  That  the  certificate  of  incorporation  of  said  United 
States  Steel  Corporation,  as  amended,  shall  read  as  follows : 

AMENDED 

Certificate  of  Incorporation 

of 

United  States  Steel  Corporation. 

We,  the  undersigned,  in  order  to  form  a  corporation  for 
the  purposes  hereinafter  stated,  under  and  pursuant  to 
the  provisions  of  the  Act  of  the  Legislature  of  the  State  of 
New  Jersey,  entitled  "An  Act  concerning  Corporations 
(Revision  of  1896),"  and  the  acts  amendatory  thereof  and 
supplemental  thereto,  do  hereby  certify  as  follows: 

I.  The  name  of  the  Corporation  is 

United  States  Steel  Corporation. 

II.  (Here  follows  the  location  of  the  principal  office  in 
New  Jersey,  and  the  name  of  the  agent  therein  and  in 
charge  thereof.) 


CHARTER  OF  THE  STEEL  CORPORATION    451 

III.  The  objects  for  which  the  corporation  is  formed 
are: 

To  manufacture  iron,  steel,  manejanese,  coke,  copper, 
lumber  and  other  materials,  and  all  or  any  articles  consist- 
ing, or  partly  consisting,  of  iron,  steel,  copper,  wood  or 
other  materials,  and  all  or  any  products  thereof. 

To  acquire,  own,  lease,  occupy,  use  or  develop  any  lands 
containing  coal  or  iron,  manganese,  stone  or  other  ores,  or 
oil,  and  any  wood  lands,  or  other  lands  for  any  purpose  of 
the  company. 

To  mine  or  othenvise  to  extract  or  remove,  coal,  ores, 
stone  and  other  minerals  and  timber  from  any  lands  owned, 
acquired,  leased  or  occupied  by  the  Company,  or  from  any 
other  lands. 

To  buy  and  sell,  or  otherwise  to  deal  or  to  traffic  in  iron, 
steel,  manganese,  copper,  stone,  ores,  coal,  coke,  wood,  lum- 
ber and  other  materials,  and  any  of  the  products  thereof, 
and  any  articles  consisting  or  partly  consisting  thereof. 

To  construct  bridges,  buildings,  machinery,  ships, 
boats,  engines,  cars  and  other  equipment,  railroads,  docks, 
ships,  elevators,  water  works,  gas  works,  and  electric  works, 
viaducts,  aqueducts,  canals  and  other  watenvays,  and  any 
other  means  of  transportation,  and  to  sell  the  same,  or 
otherwise  to  dispose  thereof,  or  to  maintain  and  operate 
the  same,  except  that  the  Company  shall  not  maintain  or 
operate  any  railroad  or  canal  in  the  State  of  New  Jersey. 

To  apply  for,  obtain,  register,  purchase,  lease  or  other- 
wise to  acquire,  and  to  hold,  use,  own,  operate  and  intro- 
duce, and  to  sell,  assign  or  otherwise  to  dispose  of,  any 
trade-marks,  trade-names,  patents,  inventions,  improve- 
ments and  processes  used  in  eonnection  with  or  secured  un- 
der letters  patent  of  the  United  States,  or  elsewhere  or 
otherwise,  and  to  use,  exercise,  develop,  grant  licenses  in 
respect  of,  or  otherwise  to  tura  to  account  any  such  trade- 
marks, patents,  licenses,  processes  and  the  like,  or  any 
such  property  or  rights. 


452     BUSINESS  ORGANIZATION  DOCUMENTS 

To  engage  in  any  other  manufacturing,  mining,  con- 
struction or  transportation  business  of  any  kind  or  char- 
acter whatsoever,  and  to  that  end  to  acquire,  hold,  own  and 
dispose  of  any  and  all  property,  assets,  stocks,  bonds  and 
rights  of  an}^  and  every  kind,  but  not  to  engage  in  any 
business  hereunder  which  shall  require  the  exercise  of  the 
right  of  eminent  domain  within  the  State  of  New  Jersey. 

To  acquire  by  purchase,  subscription  or  otherwise,  and 
to  hold  or  to  dispose  of  stocks,  bonds  or  any  other  obliga- 
tions of  any  corporation  formed  for,  or  then  or  theretofore 
engaged  in  or  pursuing,  any  one  or  more  of  the  kinds  of 
business,  purposes,  objects  or  operations  above  indicated, 
or  owning  or  holding  an}^  property  of  any  kind  herein 
mentioned,  or  of  any  corporation  owning  or  holding  the 
stocks  or  the  obligations  of  any  such  corporation. 

To  hold  for  investment,  or  otherwise  to  use,  sell  or  dis- 
pose of,  any  stock,  bonds  or  other  obligations  of  any  such 
other  corporation;  to  aid  in  any  manner  any  corporation 
whose  stock,  bonds  or  other  obligations  are  held  or  in  any 
manner  guaranteed  by  the  Companj^,  and  to  do  any  other 
acts  or  things  for  the  preservation,  protection,  improve- 
ment or  enhancement  of  the  value  of  any  such  stock,  bonds 
or  other  obligations,  or  to  do  any  acts  or  things  designed 
for  any  such  purpose;  and,  while  OTSTier  of  any  such  stock, 
bonds  or  other  obligations,  to  exercise  all  the  rights,  powers 
and  privileges  of  ownership  thereof,  and  to  exercise  any 
and  all  voting  power  thereon. 

The  business  or  purpose  of  the  Company  is  from  time  to 
time  to  do  any  one  or  more  of  the  acts  and  things  herein  set 
forth;  and  it  may  conduct  its  business  in  other  States,  and 
in  the  Territories,  and  in  foreign  countries,  and  may  have 
one  office,  or  more  than  one  office,  and  keep  the  books  of 
the  Company  outside  of  the  State  of  New  Jersey,  except  as 
otherwise  may  be  provided  by  law;  and  may  hold,  pur- 
chase, mortgage  and  convey  real  and  personal  property, 
either  in  or  out  of  the  State  of  New  Jersey. 


CHARTER  OF  THE  STEEL  CORPORATION    453 

Without  in  any  particular  liniitint,^  any  of  the  objects 
and  powers  of  the  corporation,  it  is  hereby  expressly  de- 
clared and  provided  that  the  coriioration  shall  have  power 
to  issue  bonds  and  other  obli,<,^ations  in  payment  for  prop- 
erty purchased  or  acquired  by  it,  or  for  any  other  object 
in  or  about  its  business;  to  mortgage  or  pledge  any  stocks, 
bonds  or  other  obligations,  or  any  property  which  may  be 
acquired  by  it,  to  secure  any  bonds  or  other  obligations  by 
it  issued  or  incurred;  to  guarantee  any  dividends,  or  bonds, 
or  contracts,  or  other  obligations;  to  make  and  perform  con- 
tracts of  any  kind  and  description  and  in  carrying  on  its 
business,  or  for  the  purpose  of  attaining  or  furthering  any 
of  its  objects,  to  do  any  and  all  other  acts  and  things,  and  to 
exercise  any  and  all  other  powers  which  a  copartnership  or 
natural  person  could  do  and  exercise,  and  which  now  or 
hereafter  may  be  authorized  by  law. 

IV.  The  total  authorized  capital  stock  of  the  corpora- 
tion is  eleven  hundred  million  dollars  ($1,100,000,000),  di- 
vided into  eleven  million  shares  of  the  par  value  of  one  hun- 
dred dollars  each.  Of  such  total  authorized  capital  stock, 
five  million  five  hundred  thousand  shares,  amounting  to  five 
hundred  and  fifty  million  dollars,  shall  be  preferred  stock, 
and  five  million  five  hundred  thousand  shares,  amounting  to 
five  hundred  and  fifty  million  dollars,  shall  be  common 
stock. 

From  time  to  time,  the  jn-eferred  stock  and  the  common 
stock  may  be  increased  according  to  law,  and  may  be  issued 
in  such  amounts  and  ]n'oportions  as  shall  be  determined 
by  the  Board  of  Directoi-s,  and  as  may  be  ])ermitted  by  law. 

The  holders  of  the  preferred  stock  shall  be  entitled  to  re- 
ceive when  and  as  declared,  from  the  sun)lus  or  net  profits 
of  the  corporation,  yearly  dividends  at  the  rate  of  seven  per 
centum  per  annum,  and  no  more,  payable  quarterly  on 
dates  to  be  fixed  ])y  the  by-laws.  The  dividends  on  the  pre- 
ferred stock  shall  be  cumulative,  and  shall  be  ])ayablc  be- 
fore any  dividend  on  the  common  stock  shall  be  paid  or  set 


454     BUSINESS  ORGANIZATION  DOCUMENTS 

apart;  so  that,  if  in  any  year  dividends  amounting  to  seven 
per  cent  shall  not  have  been  paid  thereon,  the  deficiency 
shall  be  payable  before  any  di^ddends  shall  be  paid  npon 
or  set  apart  for  the  common  stock. 

Whenever  all  cumulative  dividends  on  the  preferred 
stock  for  all  previous  years  shall  have  been  declared  and 
shall  have  become  payable,  and  the  accrued  quarterly  in- 
stallments for  the  current  year  shall  have  been  declared, 
and  the  Company  shall  have  paid  such  cumulative  divi- 
dends for  previous  years  and  such  accrued  quarterly  install- 
ments, or  shall  have  set  aside  from  its  surplus  or  net  profits 
a  sum  sufficient  for  the  payment  thereof,  the  Board  of  Di- 
rectors may  declare  dividends  on  the  common  stock,  pay- 
able then  or  thereafter,  out  of  any  remaining  surplus  or  net 
profits. 

In  the  event  of  any  liquidation  or  dissolution  or  wind- 
ing up  (whether  voluntary  or  involuntary)  of  the  corpora- 
tion, the  holders  of  the  preferred  stock  shall  be  entitled  to 
be  paid  in  full  both  the  par  amount  of  their  shares  and  the 
unpaid  dividends  accrued  thereon,  before  any  amount  shall 
be  paid  to  the  holders  of  the  common  stock;  and  after  the 
payment  to  the  holders  of  the  preferred  stock  of  its  par 
value,  and  the  unpaid  accrued  dividends  thereon,  the  re- 
maining assets  and  funds  shall  be  divided  and  paid  to  the 
holders  of  the  common  stock  according  to  their  respective 
shares. 

V.  The  names  and  post-office  addresses  of  the  incorpor- 
ators, and  the  number  of  shares  of  stock  for  which  sever- 
ally and  respectively  we  do  hereby  subscribe  (the  aggre- 
gate of  our  said  subscriptions  being  three  thousand  dollars, 
is  the  amount  of  capital  stock  with  which  the  corporation 
will  commence  business),  are  as  follows: 

(Here  follow  the  names  and  post-office  addresses  of  each 
of  the  incorporators,  and  the  number  of  shares  of  stock  sub- 
scribed for  by  each.) 

VI.  The  duration  of  the  corporation  shall  be  perpetual. 


CHARTER  OF  THE  STEEL  CORPORATION     455 

VTI.  Tlio  iinmbcr  of  Directors  of  tlio  Company  shall  be 
fixed  from  time  to  time  by  the  by-laws;  but  the  num})or,  if 
fixed  at  more  than  three,  shall  be  some  multiplr  of  three. 
The  Directors  shall  be  classified  with  resp('(.'t  to  the  time  for 
which  they  shall  severally  hold  office  by  dividing  them  into 
three  classes,  each  consisting  of  one-third  of  the  whole 
nmnber  of  the  Board  of  Directors.  The  Directors  of  the 
first  class  shall  be  elected  for  a  term  of  one  year;  the  Di- 
rectors of  the  second  class  for  a  term  of  two  years;  and 
the  directors  of  the  third  class  for  a  term  of  three  years; 
and  at  each  annual  election  the  successors  to  the  class  of 
Directors  whose  terms  shall  expire  in  that  year  shall  be 
elected  to  hold  office  for  the  term  of  three  years,  so  that  the 
term  of  office  of  one  class  of  Directors  shall  expire  in  each 
year. 

The  number  of  the  Directors  may  be  increased  as  may 
be  provided  in  the  by-laws.  In  case  of  any  increase  of  the 
number  of  the  directors  the  additional  Directors  shall  be 
elected  as  may  be  pro\^ded  in  the  by-laws  by  the  Directors 
or  by  the  Stockholders  at  an  annual  or  special  meeting;  and 
one-third  of  their  number  shall  l)e  elected  for  the  then  unex- 
pired portion  of  the  tcnn  of  the  Directors  of  the  first  class, 
one-third  of  their  number  for  the  unexpired  portion  of  the 
term  of  the  Directors  of  the  second  class,  and  one-third  of 
their  number  for  the  unexpired  portion  of  the  tenn  of  the 
Directors  of  the  third  class,  so  that  each  class  of  Directors 
shall  1)0  increased  equally. 

In  case  of  any  vacancy  in  any  class  of  Directors  through 
death,  resignation,  disqualification  or  other  cause,  the  re- 
mainim:^  Directors,  by  affirmative  vote  of  a  majority  of  the 
Board  of  Directors,  may  elect  a  successor  to  hold  office  for 
the  unexpired  portion  of  the  term  of  the  Director  whose 
place  shall  be  vacant,  and  until  the  election  of  a  successor. 

The  Board  of  Directors  shall  have  power  to  hold  their 
meetings  outside  of  the  State  of  New  Jersey  at  such  places 
as  from  time  to  time  may  be  designated  by  the  by-laws  or 


456     BUSINESS  ORGANIZATION  DOCUMENTS 

by  resolution  of  the  Board.  The  by-laws  may  prescribe  the 
number  of  Directors  necessary  to  constitute  a  quorum  of 
the  Board  of  Directors,  which  number  may  be  less  than  a 
majority  of  the  whole  number  of  the  Directors. 

Unless  authorized  by  votes  given  in  person  or  by  proxy 
by  Stockholders  holding  at  least  two-thirds  of  the  capital 
stock  of  the  corporation,  which  is  represented  and  voted 
upon  in  person  or  by  proxy  at  a  meeting  specially  called  for 
that  purpose,  or  at  an  annual  meeting,  the  Board  of  Di- 
rectors shall  not  mortgage  or  pledge  any  of  its  real  prop- 
erty, or  any  shares  of  the  capital  stock  of  any  other  cor- 
poration; but  this  prohibition  shall  not  be  construed  to  ap- 
ply to  the  execution  of  any  purchase-money  mortgage  or 
any  other  purchase-money  lien. 

As  authorized  by  the  Act  of  the  Legislature  of  the  State 
of  New  Jersey,  passed  March  22,  1901,  amending  the  sev- 
enteenth section  of  the  Act  concerning  Corporations  (Re- 
vision of  1896),  any  action  which  theretofore  required  the 
consent  of  the  holders  of  two-thirds  of  the  stock  at  any 
meeting,  after  notice  to  them  given,  or  required  their  con- 
sent in. writing  to  be  filed,  may  be  taken  upon  the  consent 
of,  and  the  consent  given  and  filed  by  the  holders  of  two- 
thirds  of  the  stock  of  each  class  represented  at  such  meet- 
ing in  person  or  by  proxy. 

Any  officer  elected  or  appointed  by  the  Board  of  Di- 
rectors may  be  removed  at  any  time  by  the  affirmative  vote 
of  a  majority  of  the  whole  Board  of  Directors. 

Any  other  officer  or  emploj^e  of  the  Company  may  be 
removed  at  any  time  by  vote  of  the  Board  of  Directors,  or 
by  any  committee  or  superior  officer  upon  whom  such  pow- 
er of  removal  may  be  conferred  by  the  by-laws  or  by  vote 
of  the  Board  of  Directors. 

The  Board  of  Directors,  by  the  affinnative  vote  of  a 
majority  of  the  whole  board,  may  appoint  from  the  Direct- 
ors an  executive  committee,  of  which  a  majority  shall  con- 
stitute a  quorum;  and,  to  such  extent  as  shall  be  provided  in 


CHARTER  OF  THE  STEEL  CORPORATION    457 

the  by-laws,  such  committee  shall  have  and  may  exercise 
all  or  any  of  the  powere  of  the  Board  of  Directors,  infliidinj]^ 
power  to  cause  the  seal  of  the  corporation  to  be  anix<'d  to  all 
papers  that  may  require  it. 

The  Board  of  Directors,  by  the  affinnative  vote  of  a  ma- 
jority of  the  whole  board,  may  appoint  any  other  Standing 
Committees,  and  such  Standiuij:  Committees  shall  have  and 
may  exercise  such  powers  as  shall  be  conferred  or  author- 
ized by  the  bj'-laws. 

The  Board  of  Directors  may  appoint  not  only  other  offi- 
cers of  the  Company,  but  also  one  or  more  vice-presidents, 
one  or  more  assistant  treasurers,  and  one  or  more  assistant 
secretaries;  and,  to  the  extent  provided  in  the  by-laws,  the 
persons  so  appointed  respectively  shall  have  and  may  exer- 
cise all  the  powers  of  the  president,  of  the  treasurer  and  of 
the  secretary  respectively. 

The  Board  of  Directors  shall  have  power  from  time  to 
time  to  fix  and  to  detei-mine  and  to  vary  the  amount  of  the 
working  capital  of  the  Company;  and  to  direct  and  deter- 
mine the  use  and  disposition  of  any  surplus  or  net  profits 
over  and  above  the  capital  stock  paid  in;  and  in  its  discre- 
tion the  Board  of  Directors  may  use  and  apply  any  such 
surplus  or  accumulated  profits  in  purchasing  or  acquiring 
its  bonds  or  other  obligations,  or  shares  of  its  own  capital 
stock,  to  such  extent  and  in  such  manner  and  upon  such 
terms  as  the  Board  of  Directors  shall  deem  expedient;  but 
shares  of  such  capital  stock  so  purchased  or  acquired  may 
be  resold,  unless  such  shares  shall  have  been  retired  for 
the  purpose  of  decreasing  the  Company's  capital  stock  as 
provided  by  law. 

The  Board  of  Directors  from  time  to  time  sliall  deter- 
mine whether  and  to  what  extent,  and  at  what  times  and 
places,  and  under  what  conditions  and  regulations,  the  ac- 
counts and  books  of  the  cor]ioration,  or  any  of  tbcm,  shall 
be  open  to  the  inspection  of  the  stockholders,  and  no  stock- 
holder shall  have  any  right  to  inspect  any  account  or  book 


458     BUSINESS  ORaANIZATION  DOCUMENTS 

or  document  of  the  corporation,  except  as  conferred  by 
Statute  or  authorized  by  the  Board  of  Directors  or  by  a  res- 
okition  of  the  stockholders. 

Subject  always  to  by-laws  made  by  the  Stockholders, 
the  Board  of  Directors  may  make  by-laws,'  and,  from  time 
to  time,  may  alter,  amend  or  repeal  any  by-laws;  but  any 
by-laws  made  by  the  Board  of  Directors  may  be  altered  or 
repealed  by  the  Stockholders  at  any  annual  meeting,  or  at 
any  special  meeting,  provided  notice  of  such  proposed  alter- 
ation or  repeal  be  included  in  the  notice  of  the  meeting. 

In  Witness  '\^^lereof,  we  have  hereunto  set  our  hands 
and  seals  the  23d  day  of  February,  1901. 

(Signatures  of  Incorporators.) 
(Acknowledgment.) 

5.  The  written  assent  and  signatures  of  all  the  Incor- 
poratoi'S  and  Stockholders  of  said  United  States  Steel  Cor- 
poration to  the  foregoing  amendments  and  changes  is  here- 
to appended. 

In  Witness  Whereof,  the  said  United  States  Steel  Corpo- 
ration has  caused  this  certificate  to  be  signed  by  its  Presi- 
dent, and  its  Secretary,  and  its  corjDorate  seal  to  be  hereto 
affixed,  this  1st  day  of  April,  1901. 

(Signatures  of  President  and  Secretary,  and  Corporate 

Seal.) 
(Acknowledgment.) 

We,  the  undersigned,  being  all  the  Incorporators  and 
Stockholders  of  the  United  States  Steel  Corporation,  hav- 
ing, at  a  meeting  regularly  called  for  that  purpose,  voted  in 
favor  of  the  changes  and  amendments  set  forth  in  the  above 
certificate,  do  now,  pursuant  to  law,  hereby  give  our  written 
consent  to  the  said  changes  and  alterations. 

Witness  our  hands  this  1st  day  of  April,  A.  D.  1901. 
(Here  follow  signatures  of  Incorporators  and  Stockholders.) 
(Acknowledgment.) 


V.  BY-LAWS. 

(A)— BY-LAWS  OF  THE  COLVILLE  CARBONATE 

COMPANY.* 

Article  I. — Stock. 

1.  Certificates  of  Stock  shall  be  issued  in  numerical 
order  from  the  stock  certificate  book,  be  signed  by  the  Pres- 
ident and  Treasurer  and  sealed  by  the  Secretary  with  the 
corporate  seal.  A  record  of  each  certificate  issued  shall 
be  kept  on  the  stub  thereof. 

2.  Transfers  of  Stock  shall  be  made  only  upon  the  books 
of  the  Company  and  before  a  new  certificate  is  issued  the  old 
certificate  must  be  surrendered  for  cancellation.  The 
stock  books  of  the  Company  shall  be  closed  for  transfers 
twenty  days  before  general  elections  and  ten  days  before 
dividend  days. 

3.  The  Treasury  Stock  of  the  Company  shall  consist  of 
such  issued  and  outstanding  stock  of  the  Company  as  may 
be  donated  to  the  Comjmny  or  otherwise  acquired,  and  shall 
be  held  subject  to  disposal  l)y  the  Board  of  Directoi-s.  Such 
stock  shall  neither  vote  nor  participate  in  dividends  while 
held  by  the  Company. 

Article  II.— Stockholders. 

1.  The  Annual  fleeting  of  the  stockholders  of  this 
Company  shall  be  held  in  the  principal  office  of  the  Company 
in  New  York  City  at  12  ^L  on  the  seeoiul  Monday  in  Jan- 
uary of  each  year,  if  not  a  legal  holiday,  but  if  a  legal  holi- 
day then  on  the  day  following. 

2.  Special  Meetings  of  the  stockholders  may  be  called 
at  the  principal  office  of  the  Company  at  any  time  by  reso- 

*F'om  Conyngton's  Manual  of  Corporate  Management.  Ronald  Press, 
N.  Y. 

459 


460     BUSINESS  ORGANIZATION  DOCUMENTS 

lution  of  the  Board  of  Directors,  or  upon  written  request  of 
stockholders  holding  one-third  of  the  outstanding  stock. 

3.  Notice  of  ^leetings,  written  or  printed,  for  every 
regular  or  special  meeting  of  the  stockholders,  shall  be  pre- 
pared and  mailed  to  the  last-known  post-office  address  of 
each  stockholder  not  less  than  ten  days  before  any  such 
meeting,  and  if  for  a  special  meeting,  such  notice  shall  state 
the  object  or  objects  thereof. 

4.  A  Quorum  at  any  meeting  of  the  stockholders  shall 
consist  of  a  majority  of  the  voting  stock  of  the  Company, 
represented  in  person  or  by  proxy.  A  majority  of  such 
quorum  shall  decide  any  question  that  may  come  before 
the  meeting. 

5.  The  Election  of  Directors  shall  be  held  at  the  annual 
meeting  of  the  stockholders  and  shall,  after  the  first  elec- 
tion, be  conducted  by  two  inspectors  of  election  appointed 
by  the  President  for  that  purpose.  The  election  shall  be  by 
ballot,  and  each  stockholder  of  record  shall  be  entitled  to 
cast  one  vote  for  each  share  of  stock  held  by  him. 

6.  The  Order  of  Business  at  the  annual  meeting,  and, 
as  far  as  possible,  at  all  other  meetings  of  the  stockholders, 
shall  be: 

1.  Calling  of  Roll. 

2.  Proof  of  Due  Notice  of  Meeting. 

3.  Reading  and  Disposal  of  Any  Unapproved  Minutes. 

4.  Annual  Reports  of  Officers  and  Committees. 

5.  Election  of  Directors. 

6.  Unfinished  Business. 

7.  New  Business. 

8.  Adjournment. 

Article  III.— Directors. 

1.  The  Business  and  Property  of  the  Company  shall 
be  managed  by  a  Board  of  Seven  Directors,  who  shall  be 
stockholders  and  who  shall  be  elected  annually  by  ballot 
by  the  stockholders  for  the  term  of  one  year,  and  shall 
serve  until  the  election  and  acceptance  of  their  duly  quali- 


CORPORATE  BY  LAWS  461 

fied  successors.  Any  vacancies  may  bo  filled  by  the  Board 
for  the  unexpired  temi.  Directors  shall  receive  no  compen- 
sation for  their  soi-x'iees. 

2.  The  Kegular  Mcetin.c^  of  the  IJoard  of  Directors 
shall  be  held  in  the  principal  office  of  the  Company  in  New 
York  City  at  3  p.  m.  on  the  third  Tuesday  of  each  month, 
if  not  a  legal  holiday,  but  if  a  legal  holiday  then  on  the  day 
following. 

3.  Special  Meetings  of  the  Board  of  Directors  to  be 
held  in  the  principal  office  of  the  Company  in  New  York 
City  may  be  called  at  any  time  by  the  President,  or  by  any 
three  members  of  the  Board,  or  may  be  held  at  any  time 
and  place,  without  notice,  by  unanimous  written  consent 
of  all  the  members,  or  by  the  presence  of  all  membei*s  at 
such  meeting. 

4.  Notices  of  both  regular  and  special  meetings  shall 
be  mailed  by  the  Secretary  to  each  member  of  the  Board 
not  less  than  five  days  before  any  such  meeting,  and  no- 
tices of  special  meetings  shall  state  the  purposes  thereof. 

5.  A  Quorum  at  any  meeting  shall  consist  of  a  major- 
ity of  the  entire  membership  of  the  Board.  A  majority 
of  such  quorum  shall  decide  any  question  that  may  come 
before  the  meeting. 

6.  Officers  of  the  Company  shall  be  elected  by  ])allot 
by  the  Board  of  Directors  at  their  first  meeting  after  the 
election  of  directors  each  year.  If  any  office  l)ecomes  va- 
cant during  the  year,  the  Board  of  Directoi-s  shall  fill  the 
same  for  the  unexpired  teiTn.  The  Board  of  Directoi-s  shall 
fix  the  compensation  of  the  officers  and  agents  of  the  Com- 
pany. 

7.  The  Order  of  llusiness  at  any  regular  or  special 
meeting  of  the  Board  of  Directors  shall  be: 

1.  Reading  and  Disposal  of  any  Unajiproved  Minutes. 

2.  Reports  nf  Offieers  and  Committees. 

3.  Unfinished  P)Usiness. 

4.  New  l^>usiness. 

5.  Adjournment. 


462     BUSINESS  ORGANIZATION  DOCUMENTS 

Article  IV.— Officers. 

1.  The  Officers  of  tlie  Company  shall  be  a  President, 
a  Vice-President,  a  Secretary  and  a  Treasurer,  ayIio  shall 
be  elected  for  one  year  and  shall  hold  office  until  their  suc- 
cessors are  elected  and  qualified.  The  positions  of  Secre- 
tary and  Treasurer  may  be  united  in  one  person. 

2.  The  President  shall  preside  at  all  meetings,  shall 
have  general  supervision  of  the  affairs  of  the  Company, 
shall  sign  or  countersign  all  certificates,  contracts  and  other 
instruments  of  the  Company  as  authorized  by  the  Board 
of  Directors;  shall  make  reports  to  the  directors  and  stock- 
holders and  perform  all  such  other  duties  as  are  incident 
to  his  office  or  are  properly  required  of  him  by  the  Board 
of  Directors.  In  the  absence  or  disability  of  the  President, 
the  Vice-President  shall  exercise  all  his  functions. 

3.  The  Secretary  shall  issue  notices  for  all  meetings, 
shall  keep  their  minutes,  shall  have  charge  of  the  seal  and 
the  corporate  books,  shall  sign  with  the  President  such  in- 
struments as  require  such  signature,  and  shall  make  such 
reports  and  perform  such  other  duties  as  are  incident  to 
his  office,  or  are  properly  required  of  him  by  the  Board  of 
Directors. 

4.  The  Treasurer  shall  have  the  custody  of  all  moneys 
and  securities  of  the  Company  and  shall  keep  regular  books 
of  accounts  and  balance  the  same  each  month.  He  shall 
sign  or  countersign  such  instruments  as  require  his  signa- 
ture, shall  perform  all  duties  incident  to  his  office  or  that 
are  properly  required  of  him  by  the  Board,  and  shall  give 
bond  for  the  faithful  perfonnance  of  his  duties  in  such  sum 
and  with  such  sureties  as  may  be  required  by  the  Board 
of  Directors. 

Article  V. — Dividends  and  Finance. 

1.  Dividends  shall  be  declared  only  from  the  surplus 
profits  at  such  times  as  the  Board  of  Directors  shall  direct, 


CORPORATE  BY  LAWS  463 

and  no  dividend  shall  be  declared  that   will    imp.iir  the 
capital  of  the  Company. 

2.  The  Moneys  of  the  Company  shall  he  deposited  in 
the  name  of  the  Company  in  sueh  hank  or  trust  conipaii}' 
as  the  Board  of  Directors  shall  designate,  and  shall  he 
drawn  out  only  by  check  signed  by  the  Treasurer  and  coun- 
tersigned by  the  President. 

Article  VI.— Seal. 

1.  The  Corporate  Seal  of  the  Company  shall  consist  of 
two  concentric  circles,  between  which  is  the  name  of  the 
Company,  and  in  the  center  shall  be  inscribed  "Incorpor- 
ated 1903,  New  York,"  and  such  seal,  as  impressed  on  the 
margin  hereof,  is  hereby  adopted  as  the  Corporate  Seal  of 
the  Company. 

Article  VII. — Amendments. 

1.  These  By-Laws  may  be  amended,  repealed  or  altered, 
in  whole  or  in  part,  by  a  majority  vote  of  the  entire  out- 
standing stock  of  the  Company,  at  any  regular  meeting 
of  the  stockholders,  or  at  any  special  meeting  where  such 
action  has  been  announced  in  the  call  and  notice  of  such 
meeting. 

2.  The  Board  of  Directors  may  adopt  additional  by- 
laws in  hannony  therewith,  but  shall  not  alter  nor  repeal 
any  by-laws  adopted  h}'  the  stockholders  of  the  Company. 

I  hereby  certifiy  that  the  foregoing  are  the  By-Laws  of 
the  Colville  Carbonate  Company  ado])t('d  h\'  the  stock- 
holders thereof  duly  assembled  in  their  first  meeting,  on 
the  9th  day  of  March,  190:i,  at  the  onic(>  of  the  CoTn])any, 
No.  170  Broadway,  New  York  City. 

In  Testimony  Whereof,  I  have  hereunto  affixed  my 
official  signature  and  the  corjiorate  seal  of  said 
corporation  on  this  10th  day  of  March,  190?,. 
(Corporate)  CIIAKLES  E.  WAKHEN, 

(Seal)  Secretar}\ 


464     BUSINESS  ORGANIZATION  DOCUMENTS 

(B)— BY-LAWS  OF  UNITED  STATES  STEEL 
CORPORATION. 

As  on  March  1,  1910. 

Article  I.— Stockholders. 

Section  1.  Annual  Meeting.  The  annual  meeting  of 
the  stockholders  of  the  Compan}^  shall  be  held  annually  at 
the  principal  office  of  the  Company  in  the  State  of  New 
Jersey,  at  twelve  o'clock  noon,  on  the  third  Monday  in  April 
in  each  year,  if  not  a  legal  holiday,  and  if  a  legal  holiday 
then  on  the  next  succeeding  Monday  not  a  legal  holiday,  for 
the  purpose  of  electing  directors,  and  for  the  transaction  of 
such  other  busmess  as  may  be  brought  before  the  meeting; 
and  the  terms  of  office  of  the  directors  of  the  several  classes 
shall  continue  until  the  election  of  their  successors  at  such 
meeting  as  provided  in  Article  II  hereof. 

It  shall  be  the  duty  of  the  Secretary  to  cause  notice  of 
each  annual  meeting  to  be  published  once  in  each  of  the  four 
calendar  weeks  next  preceding  the  meeting  in  at  least  one 
newspaper  in  each  of  the  following  places:  Jersey  City, 
N.  J.,  New  York,  N.  Y.,  Chicago,  111.,  and  Pittsburg,  Pa. 
Nevertheless,  a  failure  to  publish  such  notice,  or  any  irreg- 
ularity in  such  notice,  or  in  the  publication  thereof,  shall 
not  affect  the  validity  of  any  annual  meeting,  or  of  any  pro- 
ceedings at  any  such  meeting. 

Section  2.  Special  Meetings.  Special  meetings  of  the 
stockholders  may  be  held  at  the  principal  office  of  the  Com- 
pany in  the  State  of  New  Jersey,  whenever  called  in  writ- 
ing, or  by  vote,  by  a  majority  of  the  Board  of  Directors. 

Notice  of  each  special  meeting,  indicating  briefly  the  ob- 
ject or  objects  thereof,  shall  by  the  secretary  be  published 
once  in  each  of  the  four  calendar  weeks  next  preceding  the 
meeting,  in  at  least  one  newspaper  in  each  of  the  following 
places:  Jersey  City,  N.  J.,  New  York,  N.  Y.,  Chicago,  111., 
and  Pittsburg,  Pa.    Nevertheless,  if  all  the  stockholders 


BY-LAWS  OF  THE  STEEL  CORPORATION      465 

shall  waive  notice  of  a  special  nieetin^%  no  notice  of  snch 
nieetinji:  shall  he  required;  and  whenever  all  tlic  stock- 
holders shall  meet  in  ])erson  oi-  hy  ])i-oxv,  such  meeting 
shall  bo  valid  I'ur  all  purposes  without  call  or  notice,  and  at 
such  meeting  any  corporate  action  may  be  taken. 

Section  3.  Q^iorum.  At  any  meeting  of  the  stock- 
holders the  holders  of  one-third  of  all  of  the  shares  of  the 
capital  stock  of  the  Company,  present  in  person  or  repre- 
sented by  proxy,  shall  constitute  a  quorum  of  the  stock- 
holders for  all  purposes,  unless  the  representation  of  a 
larger  number  shall  be  required  by  law,  and,  in  that  case, 
the  representation  of  the  number  so  required,  shall  con- 
stitute a  ciuorum. 

If  the  holders  of  the  amount  of  stock  necessaiy  to  con- 
stitute a  quorum  shall  fail  to  attend  in  person  or  by  proxy 
at  the  time  and  place  fixed  hy  these  by-laws  for  an  annual 
meeting,  or  fixed  by  notice  as  above  provided  for  a  special 
meeting  called  by  the  directors,  a  majority  in  interest  of  the 
stockholders  present  in  person  or  by  proxy  may  adjourn, 
from  time  to  time,  without  notice  other  than  by  announce- 
ment at  the  meeting,  until  holders  of  the  amount  of  stock 
requisite  to  constitute  a  quorum  shall  attend.  At  any  such 
adjounied  meeting  at  which  a  quorum  shall  be  present,  any 
business  may  be  transacted  which  might  have  been  trans- 
acted at  the  meeting  as  originally  notified. 

Section  4.  Orfjaaization.  The  chainnan  of  the  Board, 
and  in  his  absence,  the  chairman  of  the  Finance  Connnittee, 
and  in  the  absence  of  both,  the  president,  shall  call  meetings 
of  the  stockholders  to  order,  and  shall  act  as  chairman  of 
such  meetings.  The  Board  of  Din^ctors  or  Finance  Com- 
mittee may  a})point  any  stockholder  to  act  as  chainnan  of 
any  meeting  in  the  absence  of  the  chairman  of  the  Board 
and  of  the  chainnan  of  the  Finance  Committee  and  of  the 
president. 

The  secretaiy  of  the  Company  shall  act  as  secretary  at 
all  meetings  of  the  stockholdei-s;  but  in  the  absence  of  the 

B— II— 30 


466     BUSINESS  ORGANIZATION  DOCUMENTS 

secretary  at  any  meeting  of  the  stockholders  the  presiding 
officer  may  appoint  any  person  to  act  as  secretary  of  the 
meeting. 

Section  5.  Voting.  At  each  meeting  of  the  stockhold- 
ers, every  stockholder  shall  be  entitled  to  vote  in  person, 
or  by  proxy  appointed  by  instrument  in  writing,  subscribed 
by  such  stockholder  or  by  his  duly  authorized  attorney,  and 
delivered  to  the  inspectors  at  the  meeting;  and  he  shall 
have  one  vote  for  each  share  of  stock  standing  registered  in 
his  name  at  the  time  of  the  closing  of  the  transfer  books 
for  said  meeting.  The  votes  for  directors,  and,  upon  de- 
mand of  any  stockholder,  the  votes  upon  any  question  be- 
fore the  meeting,  shall  be  by  ballot. 

At  each  meeting  of  the  stockholders,  a  full,  true  and 
complete  list,  in  alphabetical  order,  of  all  of  the  stockhold- 
ers entitled  to  vote  at  such  meeting,  and  indicating  the  num- 
ber of  shares  held  by  each,  certified  by  the  secretary  or  by 
the  treasurer,  shall  be  furnished.  Only  the  persons  in 
whose  names  shares  of  stock  stand  on  the  books  of  the  Com- 
pany at  the  time  of  the  closing  of  the  transfer  books  for 
such  meeting,  as  evidenced  by  the  list  of  stockholders  so 
furnished,  shall  be  entitled  to  vote  in  person  or  by  proxy  on 
the  shares  so  standing  in  their  names. 

Prior  to  any  meeting,  but  subsequent  to  the  time  of  clos- 
ing the  transfer  books  for  such  meeting,  any  proxy  may 
submit  his  powers  of  attorney  to  the  secretary,  or  to  the 
treasurer,  for  examination.  The  certificate  of  the  secre- 
tary, or  of  the  treasurer,  as  to  the  regularity  of  such  pow- 
ers of  attorney,  and  as  to  the  number  of  shares  held  by  the 
persons  who  severally  and  respectively  executed  such 
powers  of  attorney,  shall  be  received  as  prima  facie  evi- 
dence of  the  number  of  shares  represented  by  the  holder  of 
such  powers  of  attorney  for  the  purpose  of  establishing 
the  presence  of  a  quorum  at  such  meeting  and  of  organiz- 
ing the  same,  and  for  all  other  purposes. 

Section  6.    Inspectors.    At  each  meeting  of  the  stock- 


BY-LAWS  OF  THE  STEEL  CORPORATION     467 

holders,  the  polls  shall  he  oi)eiU'(l  and  closed,  the  proxies  and 
ballots  shall  be  received  and  l)e  tak<'n  in  diaiT^M',  and  all 
questions- touching  the  qualification  of  voters  and  the  valid- 
ity of  proxies  and  the  acceptance  or  rejection  of  votes,  shall 
be  decided  b}-  three  inspectors.  Such  inspectors  shall  be 
appointed  by  the  Board  of  Directors  before  or  at  the  meet- 
ing, or,  if  no  such  appointment  shall  have  been  made,  then 
by  the  presiding  officer  at  the  meeting.  Tf  for  any  reason 
any  of  the  inspectors  previously  appointed  shall  fail  to  at- 
tend or  refuse  or  be  unable  to  serv^e,  inspectors  in  place  of 
any  so  failing  to  attend  or  refusing  or  unable  to  attend, 
shall  be  appointed  in  like  manner. 

Article  II.— Board  of  Directors. 

Section  1.  Number,  Classification  and  Term  of  Office. 
The  business  and  the  property  of  the  Company  shall  be 
managed  and  controlled  by  the  Board  of  Directoi-s. 

As  provided  in  the  certificate  of  incorporation,  the  di- 
rectors shall  be  classified  in  respect  of  the  time  for  which 
they  shall  severally  hold  office,  by  dividing  them  into  three 
classes,  each  class  consisting  of  one-third  of  the  whole  num- 
ber of  the  Board  of  Directors.  The  directors  of  the  first 
class  shall  be  elected  for  a  term  of  one  year;  the  directors 
of  the  second  class  shall  be  elected  U^y  a  term  of  two  years; 
and  the  directors  of  the  third  class  shall  be  elected  for  a 
term  of  three  years.  At  each  annual  election,  the  succes- 
sors to  the  directors  of  the  class  whose  term  shall  expire  in 
that  year,  shall  be  elected  to  hold  office  for  the  tei*m  of 
three  years,  so  that  the  terai  of  office  of  one  class  of  direct- 
ors shall  expire  in  each  year. 

The  number  of  directors  shall  be  twenty-four;  but  the 
number  of  directoi-s  may  be  altered  from  time  to  time  bv 
the  alteration  of  these  by-laws. 

In  case  of  any  increase  of  the  number  of  directoi's,  the 
additional  directors  shall  be  elected  l)y  the  directors  then  in 
office;  one-third  of  such  additional  directors  for  the  unex- 


468     BUSINESS  ORGANIZATION  DOCUMENTS 

pired  portion  of  the  term  of  one  year;  one-third  for  the  un- 
expired portion  of  the  term  of  two  years ;  and  one-third  for 
the  unexpired  portion  of  the  tenn  of  three  years,  so  that 
each  class  of  directors  shall  be  increased  equally. 

Every  director  shall  be  a  holder  of  at  least  one  share 
of  the  capital  stock  of  the  Company.  Each  director  shall 
serve  for  the  term  for  which  he  shall  have  been  elected, 
and  until  his  successor  shall  have  been  duly  chosen. 

At  all  elections  of  the  directors,  the  polls  shall  remain 
open  for  at  least  one  hour,  unless  every  registered  o^vner  of 
shares  has  sooner  voted  in  person  or  by  proxy,  or  in  writ- 
ing has  waived  the  statutory  provision. 

Section  2.  Vacancies.  In  case  of  any  vacancy  in  the 
directors  of  any  class  through  death,  resignation,  disquali- 
fication or  other  cause,  the  remaining  directors,  by  affirma- 
tive vote  of  a  majority  thereof,  may  elect  a  successor  to  hold 
office  for  the  unexpired  portion  of  the  term  of  the  director 
w^hose  place  shall  be  vacant,  and  until  the  election  of  his 
successor. 

Such  vacancy  shall  be  filled  upon  and  after  nominations 
therefor  shall  have  been  made  by  the  Finance  Committee. 

Section  3.  Place  of  Meeting,  etc.  The  directors  may 
hold  their  meetings,  and  may  have  an  office  and  keep  the 
books  of  the  Company  (except  as  otherwise  may  be  provid- 
ed for  by  law)  in  such  place  or  places  in  the  State  of  New 
Jersey  or  outside  of  the  State  of  New  Jersey,  as  the  Board 
from  time  to  time  may  determine. 

Section  4.  Regular  Meetings.  Regular  meetings  of 
the  Board  of  Directors  shall  be  held  monthly  on  the  last 
Tuesday  of  each  month,  if  not  a  legal  holiday,  and  if  a  legal 
holiday,  then  on  the  next  succeeding  Tuesday  not  a  legal 
holiday.  No  notice  shall  be  required  for  any  such  regular 
monthly  meeting  of  the  Board. 

Section  5.  Special  Meetings.  Special  meetings  of  the 
Board  of  Directors  shall  be  held  whenever  called  by  di- 
rection of  the  chairman  of  the  Board,  or  the  chairman  of  the 


BY-LAWS  OF  THE  STEEL  CORPORATION     469 

Finance  Committee,  or  tlie  president,  or  of  onc-tliird  of  tlic 
directors  for  the  time  being  in  office. 

The  secretary  shall  give  notice  of  each  special  meeting 
by  mailing  the  same  at  least  two  days  l)ofore  the  nKH'ting, 
or  by  telegraphing  the  same  at  least  one  day  before  tiic 
meeting,  to  each  director;  but  such  notice  may  be  waived  by 
any  director.  Unless  otherwise  indicated  in  the  notice 
thereof,  any  and  all  business  may  be  transacted  at  a  si)e- 
eial  meeting.  At  any  meeting  at  which  every  director  shall 
be  present,  even  though  without  any  notice,  any  business 
may  be  transacted. 

Section  6.  Quorum.  Ten  Directors  shall  constitute  a 
quorum  for  the  transaction  of  business;  but  if  at  any  meet- 
ing of  the  Board  there  ])e  less  than  a  quorum  i)resent,  a  ma- 
jority of  those  present  may  adjourn  the  meeting  from  time 
to  time. 

The  affinnative  vote  of  at  least  one-third  of  all  the  di- 
rectoi-s  for  the  time  being  in  office  shall  be  necessary  for  the 
passage  of  any  resolution. 

Section  7.  Order  of  Business.  At  meetings  of  the 
Board  of  Directors  business  shall  be  transacted  in  such 
order  as,  from  time  to  time,  the  Board  may  detennino  by 
resolution. 

At  all  meetings  of  the  Board  of  Directors,  the  chair- 
man of  the  Board,  or  in  his  absence  the  chainnan  of  the 
Finance  Committoe,  or,  in  the  absence  of  both  of  these  of- 
ficers, the  President  shall  preside. 

Section  8.  Contracts.  Inasmuch  as  the  diiT.tois  of 
this  Company  arc  men  (»["  larLrc  .-iiicl  diversified  business 
interests,  and  are  likely  to  ])e  coiniected  with  other  corpora- 
tions with  which  from  time  to  time  this  Conqiany  must 
have  business  dealings,  no  contract  or  other  transaction  be- 
tween this  Company  and  any  other  corporation  shall  be  af- 
fected by  the  fact  that  directors  of  this  Conq)any  arc  inter- 
ested in,  or  are  directors  or  officei*s  of,  such  other  corpora- 
tion, if,  at  the  meeting  of  the  Board,  or  of  the  committee  of 


470     BUSINESS  ORGANIZATION  DOCUMENTS 

this  Company,  making,  authorizing  or  confirming  such  con- 
tract or  transaction,  there  shall  be  present  a  quorum  of  di- 
rectors not  so  interested ;  and  any  director  individually  may 
be  a  party  to,  or  may  be  interested  in,  any  contract  or  trans- 
action of  this  Company,  provided  that  such  contract  or 
transaction  shall  be  approved  or  be  ratified  by  the  affirma- 
tive vote  of  at  least  ten  directors  not  so  interested. 

The  Board  of  Directors  in  its  discretion  may  submit  any 
contract  or  act  for  approval  or  ratification  at  any  annual 
meeting  of  the  stockholders,  or  at  any  meeting  of  the  stock- 
holders called  for  the  purpose  of  considering  any  such  act 
or  contract;  and  any  contract  or  act  that  shall  be  approved 
or  be  ratified  by  the  vote  of  the  holders  of  a  majority  of  the 
capital  stock  of  the  Company  which  is  represented  in  person 
or  by  proxy  at  such  meeting  (provided  that  a  lawful  quorum 
of  stockholders  be  there  represented  in  person  or  by  proxy) 
shall  be  as  valid  and  as  binding  upon  the  corporation  and 
upon  all  the  stockholders  as  though  it  had  been  approved 
or  ratified  by  every  stockholder  of  the  corporation. 

Section  9.  Compensation  of  Directors,  For  his  at- 
tendance at  any  meeting  of  the  Board  of  Directoi-s,  or  of  any 
committee,  every  director  shall  receive  an  allowance  of 
twenty  dollars  for  attendance  at  each  meeting. 

Section  10.  Election  of  Officers  and  Committees,  At 
the  first  regular  meeting  of  the  Board  of  Directors  in  each 
year  (at  which  a  quorum  shall  be  present)  held  next  after 
the  annual  meeting,  the  Board  of  Directors  shall  proceed  to 
the  election  of  the  executive  officers  of  the  Company,  and  of 
the  Finance  Committee  to  be  elected  by  the  Board  of  Di- 
rectors under  the  provisions  of  Article  III  and  Article  IV 
of  the  By-Laws. 

Article  III. — Finance  Committee. 

Section  1.  The  Board  of  Directors  shall  elect  from  the 
directors  a  Finance  Committee,  and  shall  designate  for  such 
committee  a  chairman,  who  shall  continue  to  be  chairman 


BY-LAWS  OF  THE  STEEL  CORPORATION     471 

of  the  committee  during  the  pleasure  of  the  Board  of  Di- 
rectoi-s. 

The  Board  of  Directors  sliall  fill  vaoaneies  in  the  Fin- 
ance Connnittee  by  election  from  the  directors;  and  at  all 
times  it  shall  be  the  duty  of  t lie  Board  of  Directors  to  keep 
the  membership  of  such  committee  full,  with  due  regard  to 
the  qualifications  for  such  membership  indicated  in  this 
Article  of  the  By-Laws. 

All  action  by  the  Finance  Committee  shall  be  reported 
to  the  Board  of  Directors  at  its  meeting  next  succeeding 
such  action,  and  shall  be  subject  to  revision  or  alteration  by 
the  Board  of  Directors;  provided,  that  no  rights  or  acts  of 
third  parties  shall  be  affected  by  any  such  revision  or  alter- 
ation. 

The  Finance  Committee  shall  fix  its  owm  ndes  of  pro- 
ceeding, and  shall  meet  where  and  as  provided  by  such 
rules,  or  by  resolution  of  the  Board  of  Directors,  but  in 
every  case  the  presence  of  at  least  four  members  shall  be 
necessary  to  constitute  a  quorum. 

In  every  case  the  affimiative  vote  of  a  majority  of  all  of 
the  members  of  the  committee  present  at  the  meeting,  shall 
be  necessary  to  its  ado])tion  of  any  resolution. 

Section  2.  Tlie  Finance  Committee  shall  consist  of 
seven  members,  besides  the  chairman  of  the  Board  and 
the  president,  each  of  whom,  by  virtue  of  his  ofTice,  shall  be 
a  member  of  the  Finance  Committee.  So  far  as  practi- 
cable each  of  the  seven  elected  members  of  the  Finance 
Committee  shall  be  a  person  of  experience  in  mattei'S  of  fin- 
ance. Unless  otherwise  ordered  by  the  Board  of  Direct- 
ors, each  elected  mcm])er  of  the  Finance  Committee  shall 
continue  to  be  a  member  thereof  until  the  expiration  of  his 
term  of  office  as  a  director. 

The  Finance  Committee  shall  have  special  charge  and 
control  of  all  financial  affairs  of  the  Company.  The  presi- 
dent, the  vice-presidents,  the  general  counsel,  the  treasurer, 
the  comptroller  and  the  secretary,  and  their  respective  of- 


472     BUSINESS  ORGANIZATION  DOCUMENTS 

fices  shall  be  under  the  direct  control  and  supervision  of 
the  Finance  Committee,  and  of  its  chairman  when  the  Com- 
mittee is  not  in  session. 

During  the  intervals  between  the  meetings  of  the  Board 
of  Directors,  the  Finance  Committee  shall  possess,  and  may- 
exercise,  all  the  powers  of  the  Board  of  Directors,  in  the 
management  of  all  the  affairs  of  the  Company,  including 
its  purchases  of  property,  and  the  execution  of  legal  in- 
struments with  or  without  the  corporate  seal  in  such  man- 
ner as  said  committee  shall  deem  to  be  best  for  the  interests 
of  the  Company,  in  all  cases  in  which  specific  directions 
shall  not  have  been  given  by  the  Board  of  Directors. 

During  the  intervals  between  the  meetings  of  the  Fi- 
nance Committee,  and  subject  to  its  review,  the  chairman  of 
the  Board  and  the  chairman  of  the  Finance  Committee  to- 
gether, shall  possess,  and  may  exercise  any  of  the  powers 
of  the  committee,  except  as  from  time  to  time  shall  be  other- 
wise provided  by  resolution  of  the  Board  of  Directors. 

Except  as  otherwise  provided  by  the  By-Laws,  or  by 
resolution  of  the  Board  of  Directors,  all  salaries  and  com- 
pensations paid  or  payable  by  the  Company  shall  be  fixed 
by  the  Finance  Committee. 

No  director  not  an  executive  officer  shall  become  a  sal- 
aried employe  of  the  Company  except  by  special  vote  of  the 
Finance  Committee. 

Article  IV.— Officers. 

Section  1.  Officers,  The  executive  officers  of  the  Com- 
pany shall  be  a  chairman  of  the  Board  of  Directors,  a  chair- 
man of  the  Finance  Committee,  a  president,  a  vice-presi- 
dent, or  more  than  one  vice-president,  a  general  counsel,  a 
treasurer,  a  secretary  and  a  comptroller,  all  of  whom  shall 
be  elected  by  the  Board  of  Directors. 

The  Board  of  Directors  may  appoint  such  other  officers 
as  the^  shall  deem  necessary,  who  shall  have  such  authority 


BY-LAWS  OF  THE  STEEL  CORPORATION     473 

and  shall  perform  such  duties  as  from  time  to  time  may  be 
prescribed  by  the  Board  of  Directors. 

One  person  may  hold  more  tlian  one  office. 

In  its  discretion,  the  Board  of  Directors  by  a  vote  of  a 
majority  thereof  may  leave  imfUlcd  for  any  such  period  as 
it  may  fix  by  resolution,  any  office  except  those  of  president, 
treasurer,  secretary  and  comptroller. 

All  officers  and  a,e:ents  shall  be  subject  to  removal  at 
any  time  by  the  affimiative  vote  of  a  majority  of  the  whole 
Board  of  Directors.  All  officers,  agents  and  employes, 
other  than  officers  appointed  by  the  Board  of  Directoi*s, 
shall  hold  office  at  the  discretion  o'f.the  committee  or  of  the 
officer  appointini^  them. 

Each  of  the  salaried  officers  of  the  corporation  shall  de- 
vote his  entire  time,  skill  and  energy  to  the  business  of  the 
corporation,  unless  the  contrary  is  expressly  consented  to 
by  the  Board  of  Directors  or  the  Finance  Committee.  No 
vacation  shall  be  taken  by  any  of  such  officers  except  by 
consent  of  the  Board  of  Directoi-s  or  the  Finance  Com- 
mittee. 

The  Finance  Committee  shall  have  power  to  remove  all 
officers,  agents  and  employes  of  the  Company,  except  of- 
ficers elected  or  appointed  by  the  Board  of  Directors. 

Section  2.  Powers  and  Duties  of  the  C/mirman  of  the 
Board.  The  chainnan  of  the  Board  of  Directors  shall  be 
the  chief  executive  officer  of  the  corporatir»n  and,  subject  to 
the  Board  of  Directors  and  Finance  Committee,  shall  be  in 
general  charge  of  the  affairs  of  the  corporation.  He  shall 
preside  at  all  meetings  of  the  stockholders  and  of  the  Board 
of  Directors;  and  by  virtue  of  his  office  shall  be  a  member  of 
the  Finance  Committee. 

Section  ?>.  Poirrrs  and  Duties  of  the  President.  In 
the  absence  of  the  Chainnan  of  the  B^nird  and  the  Chairman 
of  the  Finance  Committee,  the  president  shall  preside  at 
all  meetings  of  the  stockholders  and  of  the  Board  of  Di- 
rectors.   By  virtue  of  his  office  he  shall  be  a  member  of  the 


474     BUSINESS  ORGANIZATION  DOCUMENTS 

Finance  Committee.  Subject  to  the  Board  of  Directors 
and  the  Finance  Committee,  he  shall  have  general  charge  of 
the  business  of  the  corporation  relating  to  manufacturing, 
mining  and  transportation  and  general  operation.  He  shall 
keep  the  Board  of  Directors  and  the  Finance  Committee 
and  the  Chairman  of  the  Board  and  the  Chairman  of  the 
Finance  Coromittee  fully  informed,  and  shall  freely  consult 
them  concerning  the  business  of  the  corporation  in  his 
charge.  He  may  sign  and  execute  all  authorized  bonds, 
contracts,  checks  or  other  obligations  in  the  name  of  the 
corporation,  and  with  the  treasurer  or  an  assistant  treasurer 
may  sign  all  certificates  of  the  shares  in  the  capital  stock 
of  the  corporation.  He  shall  do  and  perform  such  other 
duties  as  from  time  to  time  may  be  assigned  to  him  by  the 
Board  of  Directors. 

Section  4.  Vice-Presidents.  The  Board  of  Directors 
may  appoint  a  vice-president  or  more  than  one  vice-presi- 
dent. Each  vice-president  shall  have  such  powers,  and 
shall  perform  such  duties,  as  may  be  assigned  to  him  by  the 
Board  of  Directors  or  the  Finance  Committee. 

Section  5.  The  General  Counsel.  The  general  coun- 
sel shall  be  the  chief  consulting  officer  of  the  Company  in  all 
legal  matters,  and  subject  to  the  Board  of  Directors  and  the 
Finance  Committee,  shall  have  general  control  of  all  mat- 
ters of  legal  import  concerning  the  Company. 

Section  6.  Potvers  and  Duties  of  Treasurer.  The 
treasurer  shall  have  custody  of  all  the  funds  and  securities 
of  the  Company  which  may  have  come  into  his  hands ;  when 
necessary  or  proper  he  shall  endorse  on  behalf  of  the  Com- 
pany, for  collection,  checks,  notes  and  other  obligations, 
and  shall  deposit  the  same  to  the  credit  of  the  Company  in 
such  bank  or  banks  or  depositary  as  the  Board  of  Directors 
or  the  Finance  Committee  may  designate;  he  shall  sign  all 
receipts  and  vouchers  for  payments  made  to  the  Company; 
jointly  with  such  other  officer  as  may  be  designated  by  the 
Finance  Committee,  he  shall  sign  all  checks  made  b^  the 


BY-LAWS  OF  THE  STEEL  CORPORATION     475 

Compam%  and  shall  pay  out  and  dispose  of  the  samo  under 
the  direction  of"  tlic  iM.ni-d  or  of  flir  P'inanee  Conniiittco;  lie 
shall  sii;-n  witli  the  president,  or  such  other  person  or  |)cr- 
sons  as  may  he  designated  for  the  i)ui-pose  hy  the  I>oard  of 
Directors  or  the  Finance  Connnittee,  all  hills  rf  exchan^'e 
and  promissory  notes  of  the  Company;  he  may  si^ni,  with 
the  president  or  a  vice-president,  all  certificates  of  shares 
in  the  capital  stock;  whenever  rerpiired  hy  the  Board  of  Di- 
rectors or  hy  the  Finance  Connnittee,  he  shall  render  a 
statement  of  his  cash  account;  he  shall  enter  rei^ndarly,  in 
books  of  the  Company  to  he  kept  hy  liim  for  the  ])ui'])ose, 
full  and  accurate  account  of  all  moneys  received  and  paid 
by  him  on  account  of  the  Company;  he  shall,  at  all  reason- 
able times,  exhibit  his  books  and  accounts  to  any  director 
of  the  Company  upon  application  at  the  office  of  the  Com- 
pany during  business  hours;  and  he  shall  perform  all  acts 
incident  to  the  position  of  treasurer,  sul)ject  to  the  control 
of  the  Board  of  Directors  or  of  the  Finance  Connnittee. 

He  shall  give  a  bond  for  the  faithful  discharge  of  his 
duties  in  such  sum  as  the  Board  of  Directors  or  the  Finance 
Committee  may  require. 

Section  7.  Assisfn))f  Treasurers.  The  Board  of  Di- 
rectors or  the  Finance  Committee  may  apjioint  an  assistant 
treasurer  or  more  than  one  assistant  treasurer,  i^ach  as- 
sistant treasurer  shall  have  such  powers  and  shall  j)erform 
such  duties  as  may  be  assigned  to  him  by  tin*  Board  of  Di- 
rectors, or  by  the  Finance  Connnittee. 

Section  8.  Powers  and  Duties  of  Seerctari/.  The  sec- 
retary shall  keep  the  miinites  of  all  meetings  of  the  Board  of 
Directors,  and  the  minutes  of  all  meetings  of  the  stock- 
holdei*s,  and  also  (unless  othei'wise  dii-ected  by  the  Finance 
Connnittee)  the  minutes  of  all  conunittees,  in  books  ])ro- 
vided  for  tliat  pnrjiose;  he  shall  attend  tn  the  giving  and 
serving  of  all  notices  of  the  CN>mpany;  he  may  sign  with  the 
presid(^nt  in  the  name  of  the  Company,  all  contracts  author- 
ized by  the  Board  uf  Directors  or  by  the  Finance  Commit- 


476     BUSINESS  ORGANIZATION  DOCUMENTS 

tee,  and,  when  so  ordered  by  the  Board  of  Directors  or  the 
Finance  Committee,  he  shall  affix  the  seal  of  the  Company 
thereto;  he  shall  have  charge  of  the  certificate  books,  trans- 
fer books  and  stock  ledgers,  and  such  other  books  and 
papers  as  the  Board  of  Directors  or  the  Finance  Committee 
may  direct,  all  of  which  shall,  at  all  reasonable  times,  be 
open  to  the  examination  of  any  director,  upon  application 
at  the  office  of  the  Company  during  business  hours;  and  he 
shall  in  general  perform  all  the  duties  incident  to  the  office 
of  secretary,  subject  to  the  control  of  the  Board  of  Direct- 
ors and  of  the  Finance  Committee.  The  offices  of  secre- 
tary and  of  treasurer  may  be  held  by  one  and  the  same 
person. 

Section  9.  Assistant  Secretaries.  The  Board  of  Di- 
rectors or  the  Finance  Committee  may  appoint  one  assist- 
ant secretary  or  more  than  one  assistant  secretary.  Each 
assistant  secretary  shall  have  such  powers  and  shall  per- 
form such  duties  as  may  be  assigned  to  him  by  the  Board 
of  Directors  or  by  the  Finance  Committee. 

Section  10.  Comptroller,  The  Comptroller  shall  be 
the  principal  officer  in  charge  of  the  accounts  of  the  Com- 
pany, and  shall  perfonn  such  duties  as  from  time  to  time 
may  be  assigned  to  him  by  the  Board  of  Directors  or  the 
Finance  Committee. 

Section  11.  Voting  upon  Stocks.  Unless  otherwise 
ordered  by  the  Board  of  Directors  or  by  the  Finance  Com- 
mittee, the  chairman  of  the  Board  or  the  chairman  of  the 
Finance  Committee  shall  have  full  power  and  authority  in 
behalf  of  the  Company  to  attend  and  to  act  and  to  vote  at 
any  meetings  of  stockholders  of  any  corporation  in  which 
the  Company  may  hold  stock,  and  at  any  such  meeting  shall 
possess  and  may  exercise  any  and  all  the  rights  and  powers 
incident  to  the  ownership  of  such  stock,  and  which,  as  the 
owner  thereof,  the  Company  might  have  possessed  and  ex- 
ercised if  present.     The  Board  of  Directors  or  the  Finance 


BY-LAWS  OF  THE  STEEL  CORPORATION     477 

Committee,  by  resolution,  froni  time  to  time,  may  cunier 
like  2)owers  upon  any  other  person  or  persons. 

Article  V.— Capital  Stock— Seal. 

Section  1.  Ccrlijlcalcs  of  Slnircs.  The  certilieates  for 
shares  of  the  capital  stock  of  the  Company  shall  ])c  in  such 
fonn,  not  inconsistent  wilh  ilic  eei'titicate  of  incorporation, 
as  shall  be  prepared  or  be  approved  by  the  Board  of  Di- 
rectors. The  certiticates  shall  be  sic^ned  by  the  president 
or  a  vice-president,  and  also  by  the  treasurer  or  an  as- 
sistant treasurer. 

All  certificates  shall  be  consecutively  numbered.  The 
name  of  the  person  owning:  the  shares  represented  thereby, 
Avith  the  number  of  such  shares  and  the  date  of  issue,  shall 
be  entered  on  the  Company's  books. 

No  certificate  shall  l)e  valid  unless  it  is  sipnif'd  by  the 
president  or  a  vice-president,  and  by  the  treasurer  or  an 
assistant  treasurer. 

All  certificates  surrendered  to  the  Company  shall  be  ean- 
celed,  and  no  new  certificate  sliall  be  issued  until  the  foi-m- 
er  eertifieate  for  the  same  number  of  shares  of  the  same 
class  shall  have  been  surrendered  and  caneeled. 

Section  2.  Transfer  of  Sluircs.  Shares  in  the  capital 
stock  of  the  Company  shall  be  transferred  only  on  the 
books  of  the  Company  by  the  holder  thereof  in  person,  or 
by  his  attorney,  upon  surrender  and  cancellation  of  certi- 
ficates for  a  like  number  of  shares. 

Section  3.  Bc(juJations.  The  Board  of  Directoi-s,  and 
the  Finance  Committee  also,  shall  have  power  and  author- 
ity to  make  all  such  rules  and  regulations  as  respectively 
they  may  deem  expedient,  eoneernini:^  the  issue,  transfer 
and  ree^istration  of  certificates  for  shares  of  the  capital 
stock  of  the  Company. 

The  Board  of  Directors  or  the  Finance  Committee  may 
appoint  a  transfer  agent  and  a  registrar  of  transfers,  and 


478     BUSINESS  ORGANIZATION  DOCUMENTS 

may  require  all  stock  certificates  to  bear  the  signature  of 
such  transfer  agent  and  of  such  registrar  of  transfers. 

Section  4.  Closing  of  Transfer  Boohs.  The  stock 
transfer  books  shall  be  closed  for  the  meetings  of  the  stock- 
holders, and  for  the  payment  of  dividends,  during  such  peri- 
ods as  from  time  to  time  may  be  fixed  by  the  Board  of  Di- 
rectors or  by  the  Finance  Committee,  and  during  such  pe- 
riods no  stock  shall  be  transferable. 

Section  5.  Dividends.  The  Board  of  Directors  may 
declare  dividends  from  the  surplus  or  from  the  net  profits 
of  the  Company. 

The  dates  for  the  declaration  of  di\adends  upon  the 
preferred  stock  and  upon  the  common  stock  of  the  Com- 
pany shall  be  the  days  by  these  By-Laws  fixed  for  the  regu- 
lar monthly  meetings  of  the  Board  of  Directors  in  the 
months  of  April,  July,  October  and  January  in  each  year, 
on  which  days,  the  Board  of  Directors  in  its  discretion  shall 
declare  what,  if  any,  dividends  shall  be  declared  upon  the 
preferred  stock  and  the  common  stock,  or  either  of  such 
stocks. 

The  dividends  upon  the  preferred  stock,  if  declared,  sev- 
erally and  respectively,  shall  be  payable  quarterly  upon  the 
day  preceding  the  last  day  of  ^lay,  of  August,  of  November, 
and  of  February  in  each  year. 

The  dividends  upon  the  common  stock,  if  declared,  sev- 
erally and  respectively,  shall  be  payable  quarterly  on  the 
da}^  preceding  the  last  daj^  of  June,  of  September,  of  De- 
cember and  of  March  in  each  year. 

If  the  date  herein  appointed  for  the  payment  of  any  di- 
vidend shall  in  any  year  fall  upon  a  legal  holiday,  then  the 
dividend  payable  on  such  date  shall  be  paid  on  the  next  pre- 
ceding day  not  a  legal  holiday. 

Section  6.  Working  Capital.  The  directors  shall  not 
be  required  in  January  in  each  year,  after  reserving  over 
and  above  its  capital  stock  paid  in,  as  a  working  capital  for 
said  corporation,  such  sum,  if  any,  as  shall  have  been  fixed 


BY-LAWS  OF  THE  STEEL  CORPORATION     479 

by  the  stockholders,  to  dechiiv  a  dividmd  anion*;  its  stock- 
holders of  the  whole  of  its  accumulated  profits  exceeding 
the  amouut  so  reserved,  and  pay  the  same  to  such  stock- 
holders on  demand;  but  the  Board  of  Directors  may  fix  a 
smu  which  may  be  set  aside  or  reserved,  over  and  above 
the  Company's  capital  paid  in,  as  a  working;  capital  for  the 
Company,  and  from  time  to  time  they  may  increase,  di- 
minish and  vary  the  same  in  their  absolute  jud^nent  and 
discretion. 

Section  7.  Corporate  Seal.  The  Board  of  Directors 
shall  provide  a  suitable  seal,  containing  the  name  of  the 
Company,  which  seal  shall  be  in  charge  of  the  secretary. 
If  and  when  so  directed  1)y  the  Board  of  Directors  or  by  the 
Finance  Committee,  a  duplicate  of  the  seal  may  be  kept  and 
be  used  by  the  treasurer  or  by  any  assistant  secretary  or 
assistant  treasurer. 

Article  VI. — Amendments. 

Section  1.  The  Board  of  Directors  shall  have  power  to 
make,  amend  and  repeal  the  By-Laws  of  the  Company,  by 
vote  of  a  majority  of  all  of  the  directors,  at  any  regular  or 
special  meeting  of  the  Board,  })rovidc(i  that  notice  of  in- 
tention to  make,  amend  or  repeal  the  By-Laws  in  whole  or 
in  part  shall  have  been  given  at  the  next  preceding  meeting; 
or  without  any  such  notice,  by  a  vote  of  two-thii-ds  of  all  the 
directors. 


VI.  MISCELLANEOUS  FORMS.    ^ 

(A)— PEOXY— STOCKHOLDERS'  MEETING 

Know  All  Men  by  These  Presents, 

That  I,  the  undersigned,  being  the  owner  of 

shares  of  the  capital  stock  of  the 

Company,  do  hereby  constitute  and  appoint 

my  true  and  lawful  attorney,  in  my  name,  place  and  stead, 
to  vote  upon  the  stock  owned  by  me  or  standing  in  my 
name,  as  my  proxy,  at  the  annual  (or  special)  meeting  of 
the  stockholders  of  the  said  company,  to  be  held  at  the 

Company 's  principal  office, street, 

N.  J.,  on  the day  of 19 . . , 

and  on  such  other  day  as  the  meeting  may  be  thereafter 
held  by  adjournment  or  otherwise,  according  to  the  num- 
ber of  votes  I  am  now  or  may  then  be  entitled  to  cast,  here- 
by granting  the  said  attorney  full  power  and  authority  to 
act  for  me  and  in  my  name  at  the  said  meeting  or  meetings, 
in  voting  for  directors  of  the  said  company  or  otherwise, 
and  in  the  transaction  of  such  other  business  as  may  prop- 
erly come  before  the  meeting,  as  fully  as  I  could  do  if  per- 
sonally present,  with  full  power  of  substitution  and  revoca- 
tion, hereby  ratifying  and  confirming  all  that  my  said  at- 
torney or  substitute  may  do  in  my  place,  name  and  stead. 

In  AYitness  Whereof,  I  have  hereunto  set  my  hand  and 
seal,  this  ....  day  of 19 . . . 

Witness:  [L.  S.] 

(B)— CERTIFICATE  OF  COMMON  STOCK. 

Incorporate  and  Registered  Under  the  Laws  of  the 
State  of  New  Jersey. 

*The  Proxy,  Stock  Certificates,  Registered  Bond,  and  Certificate  of  Bis- 
solution  are  from  Dill  on  New  Jersey  Corporations,  4th  Ed.;  The  Reorganiza- 
tion Certificate  is  from  Frank's  Science  of  Organization  and  Business  ®evel- 
opment. 

480 


STOCK  CERTIFICATES  481 

Capital  Stock   $ 

(Number)  (Shares) 

Tlie    roinpanv 

This  iy  to  CV'rtitiy,  that  is  the 

registered  holder  of shares  of  the  capital  stock 

of  this  Company,  transferable  only  on  t  lie  books  of  the  ( 'om- 
]\any  by  the  holder  thereof,  in  person  or  ])y  duly  authorized 
attorney,  upon  surrender  of  this  cei-tificate  properly  en- 
dowed. 

Witness  the  seal  of  the  Company  and  the  signatures  of 

its  president  and  treasurer  this dav  of 

19... 

(Seal)  President. 

Treasurer. 
Shares,  $100  each. 

(C)— CERTIFICATE  OF  PREFERRED  STOCK. 

(Number)  (Shares) 

Incorporated  and  Registered  Under  the  Laws  of  the 
State  of  New  Jersey. 

Capital  Stock  .  . .  .* $ 

Preferred  Stock,  $  Conunon  Stock,  $ 

The Company 

This  is  to  certify,  that is  the 

registered  holder  of shares  of  tlie  jireferred  capital 

stock  of  this  company,  transferal)h^  only  on  the  books  of 
this  Company,  in  person  or  l)y  duly  authorized  attorney, 
upon  surrender  of  this  certificate  properly  endoi-sed. 

This  stock  is  pai-f  of  an  issue  amountini,^  in  all  ti» "? 

par  value,  authorized  by  the  certiticate  of  incorporation  of 
the  Company,  tiled  in  the  office  of  the  Secretary  of  State  of 

the  State  of  New  Jersey,  on  the day  of 

19... 

This  ceHificate  entitles  the  holder  thereof  to  reccMve, 
and  the  Company  is  bound  to  ])ay,  a  t'wod  y«>arly  dividend 
of per  centum  per  annum,  payable  half-yearly,  be- 

B— II— II 


482     BUSINESS  ORGANIZATION  DOCUMENTS 

fore  any  dividends  shall  be  set  apart  or  paid  on  the  com- 
mon stock,  and  the  dividends  on  the  preferred  stock  are 
cumulative.  The  preferred  stock  is  subject  to  redemption 
at  par  on  the day  of ,  19 . .  .* 

The  holders  of  the  preferred  stock  may  choose  exclu- 
sively    directors,  and  the  holders  of  the  general 

stock  may  choose  exclusively directors  of  the 

Company. 

Witness  the  seal  of  the  Company  and  the  signatures  of 

its  president  and  treasurer  this day  of , 

19... 

(Seal)]  President. 

Treasurer. 
Shares,  $100  each. 

;(DJ— REGISTERED  BOND  WITHOUT  COUPONS. 

UNITED  STATES  OF  AMERICA 

Company 

Registered  Fifty-Year  Four  Per  Cent  Gold  Bond. 

$ No 

Company,  a  corporation 

created  and  existing  under  the  laws  of  the  State  of  New 
Jersey,  and  hereinafter  termed  "the  Company,"  for  value 

received  promises  to  pay  to or  registered  assigns 

on  the  first  day  of A.  D., ,  at  its  office  or  agency 

in  the  city  of  New  York,  the  sum  of dollars  in 

gold  coin  of  the  United  States  of  the  present  standard  of 
weight  and  fineness,  and  to  pay  interest  thereon  from  the 

first  day  of or  the  first  day  of , 

as  the  case  may  be,  next  preceding  the  date  hereof,  at  the 
rate  of  four  per  cent  per  annum,  such  interest  to  be  pay- 
able to  the  registered  holder  hereof  at  said  office  or  agency 
in  like  gold  coin  semi-annually  on  the  first  days  of 

*Must  be  at  least  three  years  from  the  date  of  issue.     (N.  J.  Corpora- 
tion Laws,  Revision  of  1896,  Sec.   18.) 


REGISTERED  BONDS  483 

and  in  cacli  year.     A  LI  paymonts  upon  this 

bond,  both  of  principal  and  intiTcst,  shall  he  made  without 

deduction  of  any  tax  or  taxes  which  the 

Conij)any,  its  successors  or  assijj^ns,  may  be  required  to 
pay,  deduct  or  retain  therefr<»ni  under  any  jjrcsent  or  fu- 
ture law  of  the  United  States  or  of  any  state,  county  or 
municipality  therein. 

This  bond  is  one  of  a  duly  authorized  issue  of  coupon 

and  registered  bonds  of  the Com])any, 

the  aggregate  amoimt  whereof  is  limited  so  that  there  shall 
never  at  any  one  time  be  outstanding  bonds  of  said  issue  for 

an  aggregate  principal  sum  exceeding  $ All  of 

which  bonds  have  been  issued,  or  are  to  be  issued,  under 
and  in  pursuance  of,  and  are  to  be  secured  ratably  by,  and 

are  subject  to,  an  indenture  dated ,  A.  D., 

. . .  .,  duly  executed  by  the  Company 

to  the Trust  Company,  as  trustee,  under 

w^hich  indenture  certain  shares  of  stock  have  been  and  are 
to  be  deposited  wuth  said  trustee;  and  a  charge  is  imposed 
upon  present  and  future  net  income,  earnings  and  profits 

of  the Company;  and  hereby  refcrenc(» 

is  made  to  said  indenture  with  the  same  effect  as  if  herein 
fully  set  forth. 

No  recourse  shall  be  had  for  the  payment  of  the  princi- 
pal or  interest  of  this  bond  against  any  stockholder,  ofticer 

or  director  of  the   Company,  either 

directly  or  through  the Company,  by  virtue 

of  any  statute  or  by  enforcement  of  any  assessment  or 
othenvise,  any  and  all  liability  of  stockholders,  directoi-s 

and  officers  of  the Company  being 

hereby  released. 

This  bond  is  transferable  only  in  the  manner  prescribed 

in  said  indenture  on  the  books  of  the 

Company,  at  its  office  or  agency  in  the  city  of  New  York, 
upon  surrender  and  cancellation  of  this  bond;  and  there- 
upon a  new  registered  bond  will  be  issued  to  the  transferee 


484     BUSINESS  ORGANIZATION  DOCUMENTS 

in  exchange  therefor  on  payment  of  the  charge  provided  in 
said  indenture. 

Upon  surrender  and  cancellation  of  registered  bonds 
for  the  principal  amount  of  $1,000  or  any  multiple  thereof, 
coupon  bonds  of  a  like  amount  of  principal  with  all  un- 
matured coupons  attached  will  be  issued  as  provided  in 
said  indenture. 

This  bond  shall  not  become  or  be  valid  until  authen- 
ticated by  the  certificate  endorsed  hereon,  duly  signed  by 
the  trustee  under  said  indenture. 

In  Witness  Whereof,  the Company 

has  caused  these  presents  to  be  signed  by  a  vice-president, 
and  its  corporate  seal  to  be  hereunto  affixed  and  to  be  at- 
tested by  its  secretary  or  assistant  secretary,  this 

day  of ,  A.  D., 

Attest:  By  Company 

Secretary.         Vice-president. 

(E)— REORGANIZATION  CERTIFICATE. 

This  is  to  Certify  That  Richard  Roe  of  Chicago,  Illinois 
(hereinafter  designated  as  the  transferer),  has  transferred 
and  delivered  to  William  Smith  (hereinafter  designated  as 
the  transferee).  Certificate  No.  23  for  1,000  shares  of  the 
capital  stock  of  the  Doe  Electrical  Mfg.  Co.,  for  the  pur- 
poses and  upon  the  conditions  following,  viz.: 

First.  That  the  transfer  above  named  is  made  to  en- 
able the  said  transferee  to  effect  a  reorganization  of  the 
said  Company,  by  reincorporating  the  same  under  the  laws 
of  the  State  of  Illinois;  said  Illinois  corporation  to  be 
known  by  the  same  or  similar  name  as  the  present  organi- 
zation, and  to  have  a  capital  stock  of  $125,000;  that  the  new 
corporation,  when  formed,  shall  have  $10,000  in  cash  paid 
in  its  treasury,  after  all  obligations  of  the  present  Company 
are  discharged;  and  also  to  have  in  its  treasury  $15,000 — 
face  value — of  its  capital  stock  for  sale,  at  par;  that  said 


CERTIFICATE  OF  DISSOLUTION  485 

corporation,  when  reorp^nnizod  l)y  said  transferor,  sliall  pos- 
sess and  own  by  transfer  fn^m  the  Hoard  of  Directors  of 
the  present  corporation  all  the  assets  thereof. 

Second.  That  the  said  trarLsferee  a.i,'rees  to  deliver, 
and  the  said  transferer  agrees  to  receive,  in  lieu  of  said 
stock  certificate,  a  new  certificate  in  the  said  reorganized 
Company,  for  50  shares  of  its  capital  stock  at  the  par  vahi(^ 
of  $10.00  per  share,  fully  paid  and  non-assessahle. 

Third.  It  is  further  understood  that  this  agreement  is 
made,  and  the  said  reorganization  is  contemplated,  for  the 
purpose  of  discharging  the  obligations  of  the  said  The  Doe 
Electrical  iMfg.  Co.,  and  to  preserve  its  assets  for  the  benefit 
of  all  its  stockholders,  equally,  and  that  to  accomplish  said 
objects  the  said  transferee  is  hereby  vested  with  all  the 
powere  and  rights  of  o^^^lership,  in  and  to  the  said  stock 
so  transferred,  and  with  full  power  to  consummate  said 
reorganization  in  accordance  herewith. 

Fourth.  It  is  further  agreed  that  the  said  transferee 
shall  perfect  said  reorganization,  as  soon  as  may  be  after 
all  the  outstanding  stock  in  the  present  corporation  is 
transferred  and  surrendered  under  the  tenns  of  this  cer- 
tificate; that  upon  his  failure  or  inability  so  fo  do,  within 
a  reasonable  time,  he  shall  redeliver  and  transfer  said  cer- 
tificate to  the  said  transferer. 

In  Testimony  Whereof,  the  said  parties  hereto,  have 
hereunto  set  theii-  hands,  and  afTixed  their  seals,  at  Chicago, 
Illinois,  this  4th  day  of  Mav,  A.  D.,  1907. 

HTCTTARD  KOE       (Real) 
WILLIA.M  JSMITH  (Seal) 


486     BUSINESS  ORGANIZATION  DOCUMENTS 

(F)— CEETIFICATE  OF  DISSOLUTION  ISSUED  BY 
SECEETARY  OF  STATE. 

State  of  New  Jersey. 

Department  of  State. 
Certificate  of  Dissolution. 
To  All  to  Whom  These  Presents  May  Come,  Greeting: 

Whereas,  it  appears  to  my  satisfaction  by  duly  authen- 
ticated record  of  the  proceedings  for  the  voluntary  dissolu- 
tion thereof  by  the  unanimous  consent  of  all  the  stock- 
holders, deposited  in  my  office,  that  the 

Company,  a  corporation  of  this  State,  whose  principal  office 

is  situated  at  No street,  in  the  city  of , 

County  of • ,  State  of  New  Jersey  ( 

being  the  agent  therein  and  in  charge  thereof  upon  whom 
process  may  be  served),  has  complied  with  the  require- 
ments of  *'An  Act  Concerning  Corporations  (Revision  of 
1896),"  preliminary  to  the  issuing  of  this 

Certificate  of  Dissolution. 

Now,  Therefore,  I, Secretary  of  State  of  the 

State  of  New  Jersey,  do  hereby  certify  that  the  said  corpor- 
ation did  on  the day  of ,  19. .,  file  in 

my  office  a  duly  executed  and  attested  consent  in  writing 
to  the  dissolution  of  said  corporation  executed  by  all  the 
stockholders  thereof,  which  said  consent,  and  the^  record 
of  the  proceedings  aforesaid  are  now  on  file  in  my  said  office 
as  provided  by  law. 

In  Testimony  Whereof,  I  have  hereto  set  my  hand  and 

affixed  my  official  seal  at  Trenton,  this  ....  day  of 

A.  D.,  19... 

(L.  S.i  Secretary  of  State. 


QUESTTOXS  IN 

BUSINESS  ADMINISTRATION 

BUSINESS    ORGANIZATION    AND    MANAGEMENT. 

Fundamental  Principles. 

1.  "Wliat  would  l)c  the  nature  of  a  complete  in(li\idual 
economic  life?  Page  3. 

2.  Illustrate  social  economy.  Page  4. 

3.  Define  organization.    "What  is  the  object  of  the  busi- 
ness organization?  Pages  5,  6. 

4.  AMiat  is  the  relationship  between  business  manage- 
ment and  business  organization  ?  Pages  6,  7. 

5.  What  are  the  factors  of  wealth  production?       Pago  8. 

6.  Distinguish  between  a  partial  business  unit  and  a 
complete  business  unit.  Pages  12,  13. 

7.  What  are  the  characteristics  of  the  ct)mmunistic  so- 
ciety? Page  14. 

8.  How  do  socialists  differ  from  communists?      Page  15. 

9.  IIow  is  the  co-operative  society  managed?      Page  16. 

10.  What  industry  requires  the  simplest  form  of  business 
organization?    The  most  complex  fonn?    Why? 

Pages  19-21. 

11.  In  what  respects  do  governments  protect  business  or- 
ganizations? Page  22. 

12.  What  is  the  attitude  of  governments  toward  the  com- 
l)inati(.n?  Pagos  22,  23. 

13.  IIow  does  co-operation  at  tlie  prt-scnt  time  differ  from 
that  of  early  times?  Page  26. 

14.  What  part  does  accountancy  play  in  the  modem  busi- 
ness organization?  Page  27. 

487 


488  BUSINESS  ORGANIZATION 

15.    What  factors  have  prevented  the  development  of  the 
business  organization?  Page  28. 

Organization  of  Business  Enterprises. 

1.  What  business  enterprises  cannot  be  conducted  by  an 
individual?  Page  29. 

2.  How  is  the  law  of  survival  of  the  fittest  applied  to  in- 
dividual proprietorships?  Page  31. 

3.  To  what  classes  of  industrial  enterprises  is  the  indi- 
vidual proprietorship  adapted?  Page  32. 

4.  Why  cannot  the  business  of  a  partnership  be  con- 
ducted through  a  board  of  directors?  Page  33. 

5.  Describe  the  development  of  the   general  partner- 
ship. Page  34. 

6.  What  subjects  should  be  covered  by  the  articles  of  co- 
partnership of  any  business  undertaking?       Page  35. 

7.  Explain  the  origin  of  the  partnership.  Page  39. 

8.  To  what  forms  of  business  enterprise  is  the  partner- 
ship adapted?    Why?  Page  40. 

9.  What  was  the  cause  of  the  slow  development  of  the 
corporation?  Page  41. 

10.  What  is  the  advantage  in  the  principle  of  limited 
liability?  Pages  43,  44. 

11.  Compare  the  management  of  the  corporation  with 
that  of  the  individual  proprietorship;  with  that  oi 
the  partnership.  Pages  47,  48. 

12.  What  are  the  characteristics  of  a  municipal  corpor- 
ation? A  social  corporation?  A  business  corpor- 
ation? Pages  49,  50. 

13.  How  are  business  corporations  subdivided?  Why  is 
such  subdivision  important?  Page  50. 

The  Formation  of  the  Corporation. 

1.  What  methods  does  a  promoter  use  to  secure  cap- 
ital? Page  57. 

2.  What  points  must  a  promoter  consider  in  choosing  the 


QUIZ  QUESTIONS  489 

state  in  which  to  take  out  a  charter  of  incorpor- 
ation? Pages  57-60. 

3.  What  are  the  leading  charter-granting  states? 

Page  60. 

4.  What  is  the  method  of  forming  a  corporation  in  Ill- 
inois?   In  New  Jersey?  Pages  60-62. 

5.  What  is  meant  by  watered  stock?  Page  62. 

6.  ^Miat  connection  with  the  corporation  does  a  bond- 
holder have?  Page  63. 

7.  ^\liat  is  cumulative  preferred  stock  ?  Page  64. 

8.  "What  is  the  relation  between  the  preferred  stock  and 
the  bonds  of  a  corporation?  Page  66. 

9.  What  must  be  the  value  of  the  common  stock  in  any 
corporation?  Pages  66,  67. 

10.  How  can  the  common  stock  issue  be  inflated?  What 
are  the  results  of  such  inflation?  Pages  67-70. 

11.  What  points  must  every  charter  of  incorporation  in- 
clude? Page  71. 

12.  Wliy  was  the  decision  in  the  Dartmouth  College  case 
so  important?  Page  74. 

13.  AVhat  is  the  purpose  of  the  by-laws  of  a  corporation? 

Pages  75,  76. 

14.  What  are  the  duties  of  the  chairman  of  the  board  of 
directors?  Page  79. 

15.  What  evils  are  connected  with  the  declaration  of  divi- 
dends in  a  corporation?  What  precautions  are  taken 
to  guard  against  these  evils?  Page  82. 

16.  How  does  the  manner  in  which  the  by-laws  of  a  cor- 
poration are  amended  in  Illinois  differ  from  that  in 
New  Jersey  ?  Page  84. 

Internal  Organization  of  the  Corporation. 

1.  Wliat  two  fundamental  rights  have  all  bondholders? 

Page  85. 

2.  Wliat  is  the  function  of  the  receiver?  Pago  86. 

3.  WTio  has  the  direct  control  of  a  corporation!   Page  87. 


490  BUSINESS  ORGANIZATION 

4.  State  two  instances  in  which  the  stockholders  may 
supervise  the  management  of  the  corporation. 

Page  88. 

5.  What  gave  rise  to  the  specific  proxy?    Why  is  a  spe- 
cific proxy  impracticable?  Page  91. 

6.  Illustrate  the  principle  of  cumulative  voting.  Page  92. 

7.  How  does  the  stockholder  secure  a  knowledge  of  the 
financial  condition  of  a  corporation?  Page  93. 

8.  What  does  the  expression  "cutting  a  melon"  mean  on 
Wall  Street?  Page  95. 

9.  Wlio  has  the  right  to  declare  dividends  in  a  corpor- 
ation? Page  98. 

10.  Wlien  is  a  stockholder  individually  liable  for  debts 
due  the  creditors  of  a  corporation?  Page  102. 

11.  AMiat  right  have  creditors  to  interfere  in  the  manage- 
ment of  a  corporation?  Page  104. 

12.  What  are  the  duties  of  the  directors  of  a  corporation? 

Page  104. 

13.  What  consideration  should  govern  directors  in  fore- 
going dividends  ?  Page  107. 

14.  How  can  a  director  be  removed  from  office  ?    Page  109. 

Organization  for  Operation. 

1.  What  feature  is  common  to  the  chief  executives  of  the 
different  forms  of  business  enterprise  ?  Page  117. 

2.  How  do  directors  sometimes  become  the  tools  of  the 
executive  officers  of  a  corporation?  Page  120. 

3.  Illustrate  the  two  methods  used  in  organizing  the  op- 
erations of  a  company  into  departments.       Page  123. 

4.  Wliy  should  the  work  of  collection  be  made  a  branch 
of  the  general  accounting  department?  Page  126. 

5.  AYhat  are  the  advantages  of  the  departmental  account- 
ing system?  Page  127. 

6.  How  are  those  in  charge  of  the  price-making  aided  by 
the  central  accounting  system?  Page  130. 


QUIZ  QUESTIONS  491 

7.  What  one  qualilieatioii  inu.st  a  credit  man  possess? 

Pa^e  135. 

8.  What  are  the  disadvantages  of  the  department  system 
of  {)iir('hasing?  Page  138. 

7.     What  advantages  does  a  steel  mannfaetnring  ('om])any 
gain  by  owning  its  own  mines?  Page  1  V2. 

10.  Give  an  instance  where  a  testing  laboratory  is  an  aid 
to  a  mamifacturing  company.  Page  145. 

11.  How  is  the  advertising  agent  guided  in  choosing  a 
medium?  Page  151. 

12.  What  character  of  advertising  should  be  done  through 
an  agency?  Through  the  advertising  department  of 
the  concern?  Page  153. 

13.  Compare  the  brokerage  and  conunission  systems  of 
selling  goods.  Page  15(). 

14.  What  are  the  advantages  of  selling  through  a  com- 
mission house  ?  Page  157. 

15.  What  object  has  the  manufacturer  in  using  the  con- 
tract system  of  selling  to  the  wholesaler?       Page  IGO. 

1().  What  changes  are  made  in  the  selling  organization 
when  the  manufacturer  sells  to  the  retailer?  Page  160. 

17.  How  can  the  district  manager  test  the  accurac.v  of  the 
salesmen's  reports?  Page  164. 

18.  What  knowledge  must  the  rating  di\dsion  of  a  traffic 
department  possess?  Page  167. 

Inter-Relations  of  Business  Enterprises. 

1.  "Wliat  is  the  work  of  the  Chaml)cr  of  Conuncrce  of 
Champaign,  111.?  Page  171. 

2.  How  does  the  ^Eerchants'  Association  of  New  York 
City  differ  from  the  general  association?         Page  172. 

3.  In  what  two  projects  has  the  Illinois  ^fanufacturers' 
Association  been  interested?  Page  173. 

4.  AVhat  methods  of  working  does  the  Illinois  ^lanufac- 
turers'  Association  employ?  Page  175. 


492  BUSINESS  ORGANIZATION 

5.  What  facts  show  that  combinations  are  considered  il- 
legal in  the  United  States  ?  Page  176, 

6.  What  is  the  purpose  of  a  combination?  Page  177. 

7.  What  is  the  nature  of  a  geographical  combination? 

Page  178. 

8.  How  is  a  profit-sharing  combination  managed? 

Page  179. 

9.  Why  is  the  trust  more  advantageous  than  the  com- 
bination? Page  180. 

10.  What  part  has  New  Jersey  played  in  the  development 
of  the  holding  corporation?  Page  182. 

11.  In  what  respects  is  the  holding  corporation  like  the 
trust?  Page  183. 

12.  Distinguish  between  the  contingent  lease  and  the  di- 
rect money  rental.  Page  184. 

13.  How  is  a  merger  formed?  Page  185. 

Business  Efficiency. 

1.  Give  an  example  of  technical  efficiency  without  busi- 
ness efficiency.  Page  186. 

2.  Wherein  does  the  success  of  a  business  depend  upon 
technical  efficiency?  Page  188. 

3.  What  would  be  the  disadvantages  were  a  milling  com- 
pany to  own  the  source  of  the  raw  materials  used? 

Page  199. 

4.  What  has  caused  the  decline  in  the  driving  method  of 
getting  men  to  do  their  work?  Page  203. 

5.  Name  some  disadvantages  of  the  piece  wage  system. 

Page  204. 

6.  Upon  what  principles  is  the  premium  plan  of  wage 
payment  based?  Page  209. 

7.  How  is  the  price  of  an  article  determined  by  a  com- 
pany which  has  no  competitors  ?  Pages  217,  218. 

8.  How  does  accounting  assist  the  management? 

Pages  223,  224. 


QUIZ  QUESTIONS  493 

Railroad  Organization. 

1.  What  is  domaiidod  of  railroad  omployos  as  ono  of  the 
greater  results  of  the  recent  great  railroad  consolida- 
tions? Page  225. 

2.  What  duty  is  the  construction  department  of  a  rail- 
way charged  with?  Page  229. 

3.  What  are  the  weak  and  vulnerable  points  of  attack 
of  railroad  corporations?  Page  231. 

4.  With  what  object  was  the  freight  claim  organization 
inaugurated?  Page  236. 

5.  Wliat  is  the  per  cent  of  the  entire  number  of  locomo- 
tives on  a  railroad  that  are  constantly  in  the  shops  for 
repairs  ?  Page  242. 

A  Railroad  Purchasing  Department. 

1.  "WTiat  information  should  requisitions  sent  to  a  rail- 
road purchasing  department  contain?  Page  248. 

2.  AVhat  advantages  are  gained  from  the  adoption  of  uni- 
foiTn  standards  of  design  for  articles  used  in  large 
quantities?  Page  250. 

3.  ^Miat  important  relations  exist  between  the  stores  and 
the  purchasing  departments  of  a  railroad  ? 

Pages  251,  252. 

4.  Why  should  the  purchasing  agent  of  a  railroad  keep  in 
close  touch  with  the  industrial  department? 

Pages  252,  253. 

The  Promoter  in  Modem  Business. 

1.  From  what  points  of  view  should  a  promoter  consider 
a  business  opportunity  in  order  to  satisfy  himself  that 
it  is  worth  developing?  Page  258. 

2.  What  are  the  qualities  of  a  successful  promoter? 

Page  260. 

3.  Wliat  inducements  are  offered  by  some  states  to  out- 
side incorporators?  Page  263. 


494  BUSINESS  ORGANIZATION 

4.  Why  were  most  of  the  trusts  floated  in  an  overcapital- 
ized condition  ?  Page  266. 

5.  What  kinds  of  securities  may  a  corporation  issue? 

Page  266. 

6.  How  are  difficulties  arising  from  the  distance  of  a 
corporation  from  the  state  in  which  it  is  incorporated 
overcome?  Page  268. 

7.  Define  the  prospectus  from  the  standpoint  of  the  pro- 
moter; from  the  standpoint  of  the  prospective  investor. 

Pages  269,  270. 

8.  Explain  the  method  of  selling  securities  by  under- 
writing. Page  271. 

9.  What  are  the  temptations  of  a  promoter?     Page  273. 

The  Financiering  of  Trusts. 

1.  What  expenses  must  be  paid  for  out  of  the  surplus 
securities  of  a  corporation?  Page  278. 

2.  How  may  preferred  stock  be  made  to  resemble  bonds? 
Which  form  is  the  most  advantageous  ?  Page  281. 

3.  Give  a  method  for  calculating  the  good-will  of  the  con- 
stituent companies  of  a  corporation.  Page  282. 

Financial  and  Industrial  Trusts. 

1.  What  was  the  character  of  the  early  trust  ?    Page  288. 

2.  Name  two  periods  when  the  president  of  the  Trust 
Company  of  the  Republic  should  have  given  up  the 
financing  of  the  Shipbuilding  Company. 

Pages  300,  301. 

3.  What  were  the  terms  of  the  agreement  under  which 
the  Shipbuilding  Company  was  to  take  over  the  Beth- 
lehem Steel  Company  ?  Page  304. 

4.  How  did  the  Shipbuilding  Company  raise  money  to 
complete  the  purchase  of  the  Bethlehem  Steel  Com- 
pany? Pages  309-314. 

5.  What  is  the  present  relation  between  financial  and 
industrial  trusts?  Page  319. 


QUIZ  QUESTIONS  495 

New  Jersey's  Corporate  Policy. 

1.  What  mistake  has  New  York  made  in  her  corporate 
policy?  Pa^os  322-826. 

2.  What  were  the  terms  of  the  Slater  Pill?  Why  was  it 
defeated?  How  did  New  Jersey  treat  the  same  ques- 
tion? ^  Pages  :i27,  328. 

3.  What  is  the  importance  of  a  certificate  of  incorpora- 
tion in  New  York  ?   In  New  Jersey  ?      Pages  331,  332. 

4.  How  do  some  corporations  doing  business  in  New 
York  City  dodge  the  local  taxes?  Pages  334,  336. 

5.  What  is  a  registration  company  ?  Pages  337,  338. 

6.  What  have  been  the  results  of  New  Jersey's  corporate 
policy  on  her  finances?  Banks?  Industries?  The 
beneii?  Pages  338-341. 

Corporate  Reorganizations  and  Receiverships. 

1.  Why  is  it  good  policy  to  consult  the  rights  of  the  stock- 
holder in  drawing  up  plans  of  reorganization? 

Page  351. 

2.  What  are  the  features  of  an  income  bond  ?     Page  354. 

3.  Why  is  it  better  to  represent  deferred  claims  by  pre- 
ferred stocks  than  by  income  bonds?  Page  356. 

4.  Why  do  bondholders  object  to  reorganizing  mider  a 
new  charter?  Pages  359,  360. 

5.  What  is  the  manner  generally  pursued  in  appointing 
a  friendly  receiver?  Page  363. 

6.  How  may  the  right  to  issue  receivers'  certificates  be 
abused?  Page  368. 

7.  VThy  is  it  becoming  necessary  for  an  insolvent  manu- 
facturing company  to  be  put  in  the  hands  of  a  re- 
ceiver? Page  370. 

Dissolution  of  a  Private  Corporation. 

1.  When  does  the  consolidation  of  two  companies  effect 
a  dissolution  ?  Page  372. 

2.  How  may  voluntary  dissolution  be  brought  about? 

Page  373. 


INDEX 

BUSINESS  ORGANIZATION  AND  MANAGEMENT. 


ACCOUNTING— 

as  an  ai<l  in  management,  223,  224. 

department  of,  12()-i:{7. 

in  business  organization,  27. 

of  investments,  190-201. 
ADVERTISING— 

division  of  sales  department,  149- 
154. 
ASSOCIATION— 

defined.   169. 

Illinois  Manufacturers',  17:5-176. 

Merchants',    of    New    York    City, 
171-17:?. 

types  of,  17U-17G. 
AUDITOR— 

of  corporation,  81. 

BOND— 

registered,  482-484. 
BONDHOLDERS— 

rights   of.   85-87. 
BROKERAGE— 

system  of  selling,  156. 
BUREAU— 

of  estimates,  154,  155. 
BUSINESS— 

defined.  3. 

efficiency,   180-224. 

industrial  conditions  aflfccting,  27. 
28. 

methods  of  conducting.  14-19. 

nature  of,  1. 

organization,  3,  G. 

political    conditions   affecting.   21- 
24. 

social   conditions  afTecting.  24-27. 

units.  11-13. 
BY-LAWS— 

of  corporation,  75-84,  459-470. 
amendments  to,  84. 

CAPITAL— 

a  factor  of  production,  10. 
CAPITALIZATION— 

of  corporation,  02-70. 
CERTIFICATES— 

of  dissolution,  480. 

reorganization,  484,  485. 

stock.  480-482. 
CH  A I  R.MAN— 

of   board,   79. 

B.II-32 


CHAMBER  OF  COMMERCE— 

of  Champaign,  170,  171. 
CHARTERS— 

corporate,  70-75,  445-458. 
COLLECTIONS^ 

division  of,   135-1.17. 
COM  BI. NATIONS— 

classification    of,    177. 

compared  with  associations,  17C. 

disadvantages  of,  179. 

for  sharing  business,  178. 

for   sharing  profits,  179. 

geographical,  178. 

legality  of,  17G. 

price,    177. 

production,  178. 

purpose  of,  177. 
COM.MERCE— 

organizations  needed  by,  20. 
COMMISSION— 

plan  of  selling,  156-158. 
COM.MUNISM.    14. 
COMMUNITY- 

of  interests,  184,  185. 
COM PA NY- 
joint  stock,  34. 

leasing,    1S4. 

sellintr.  ir.0-158. 
CO  NTR.ACTS— 383-390. 
CO-OPERATION— 

success  of,  17. 
CO-PARTNERSHIP— 

articles  of,  35-40,  375-382. 
CORPORATE— 

policv  of  New  Jcrscv.  :vJl-344. 
CORPORATION— 

acts.  391-444. 

advantages  of,  51. 

bondholders  of,  84-87. 

business,   50. 

by-laws    of,  75-84. 

capitalization  of,  62-70. 

characteristics  of,  41,  43-49. 

defined,  41. 

development  of,  41. 

directors   of,  77. 

disadvantages    of,    52-54. 

dividends  of.  82.  83. 

finance  of,  83.  84. 

formation  of.  56-84. 

growth  of,  54-56. 

holding.  181-183. 


49', 


498 


INDEX 


CORPORATION— Continued 

internal  organization  of,  84-115. 

municipal,    49, 

name  of,  71. 

object  of,  72. 

officers  of,  78-82. 

operating  organization  of.  115-167. 

private,  dissolution  of,  372-374. 

social,  49. 

stockholders  of,  87-103. 
COUNSEL— 

general,  of  corporation,  81. 
CREDITORS— 

liabilities  of  directors  to.  111. 

liabilities   of   stockholders   to,   99- 
103. 

rights  of,  103. 
CREDITS— 

division  of,  132-135. 

DEBT— 

floating.  364. 
DEPARTMENT— 

accounting,  126-137. 
legal,  125. 

manufacturing,  143-149. 
ore  and  coal,  141,   142. 
purchasing,  137-141. 
purchasing    (railroad),    organiza- 
tion of,  244-256. 
sales,   149-165. 
traffic,  166-168. 
DIRECTORS— 

and  stockholders,  109. 
and  vacancies,  109. 
duties  of,  104-110. 
election  of,  88. 
liabilities  of,  110-113. 
provision  for,  in  by-laws,  77. 
DISSOLUTION— 

certificate  of,  486. 
DIVIDENDS— 

of  corporation,  82,  83. 
DIVISION— 

advertising,    of   sales    department, 

149-154. 
estimating,    of    sales    department 

154,  155. 
of  accounts,  127-132. 
of  collections,  135-137. 
of  credits,  132-135. 
order,  105. 
rate,  166,  168. 
selling,  163-165. 
shipping,   166. 
DOCUMENTS— 

articles  of  copartnership,  375-382. 

by-laws,  459-479. 

certificate  of  dissolution,  486. 

charters,  445-458. 

contracts,  383-390. 

corporation  acts,  391-444. 

t>roxy,  480. 


DOCUMENTS— Continued 

registered  bond,  482-484.     . 
reorganization  certificate.  484,  485. 
stock  certificates,  480-^482, 

ECONOxMY- 

individualistic,  3, 

social,  4. 
EFFICIENCY— 

business,  186-224. 

in  investment,  189,  190, 

of  operation,  201-224. 

technical,   186-189. 

tests  of,  221-223. 
ENTERPRISER— 

function  of,  11,  28. 

individual,  29. 

factor  of  production,  11. 
ENTERPRISES— 

business, 

inter-relations  of,  168-185. 
methods  of  conducting,  14-19. 
organization   of,  28-56. 
ESTIMATING— 

branch   of  sales   department,   154, 
155. 
EXCHANGES— 

stock,  108. 
EXECUTIVE— 

features  of,  116. 

functions  of,  121-124. 

responsibilities  of,  119-121. 

single  V.  plural,  117-119. 

FACTORS— 

of  wealth  production,  8-11. 
FINANCE— 

of  corporation,  83. 

GOVERNMENTS— 

and  business  organization,  21-24. 
GROUPS— 

industrial,    19-21. 

INCORPORATION— 

articles  of,  70-75. 

certificate  of,  70-75. 

charter  of,  70-75. 
INDUSTRIES— 

classification  of,  19-21. 

extractive,  19. 
INFLATION— 

of  common  stock,  67-70. 
INTERESTS— 

community  of,  184,  185. 
INVESTMENT— 

accounting,  196-198. 

LABOR— 

problem,  202-215. 
LABORATORY— 

testing,    of    manufacturing     com- 
pany, 145,  146. 


INDEX 


499 


LAND— 

a  Cictor  of  production,  8.  9. 
LEASK— 

contingent,   184. 
LEASING— 

company,  184. 
LEGAL— 

department.  125i 
LL\niI.ITY— 

doulile,  45. 

limited,  43,  44,  69,   70. 

MAX— 

a  factor  of  production,  9. 
MANAGEMENT- 

business,  R,  7. 

defined,  6. 

how  accounting  assists,  223,  224. 

problem  of.  219-224. 
M  A  N  U  FA  CT  U  R I N  G— 

department,   143-149. 

organizations  needed  by,  20. 
MATERLXLS- 

raw.  accounting  of,  198-201. 
MERGER— 

defined,  185. 

NEW  JERSEY— 

corporate  policy  of.  321-344. 

OFFICERS— 

of  corporation,  78-82,  113,  114 
ORDER— 

division  of  sales  department,  lo:,. 
ORE  AND  COAL— 

department,  141,  142. 
ORGANIZATION— 
business, 

accountancy  in,  27. 

and  management  (article),   1- 

224. 
industrial  conditions  afFectink'. 

27,  28. 
kind.s  of,  28,  29. 
political    conditions  aflfectine 

21-24. 
social  conditions  aflFectine.  2i- 
27. 
corporate.  40-168. 
defined,   5. 
functional.  121-107. 
manapcrial,  17-19. 
of  railroad  purchasing  department 

(article),  244-250. 
principles  of,  115. 
railroad   (article),  225-243. 
required  by  commerce.  20. 
required   by  extractive   industries, 

19. 
required  by  manufacturing,  20. 
required  bv  transportation.  21 
social.  1  j-17. 


ORGANIZATION— Continued 
communistic,  14. 
co-operative,  10.  17. 
socialistic,  15,  16. 
voluntary,  10. 

PA RTNERSU IP- 
defined.  32. 
features  of,  32,  33. 
general,    33,    34. 
limited,  34. 
mininp,  34. 
ordinary,  33. 
origin  of.  39. 
special,  33,  34. 
TLA NT- 
location   of,   190. 
power.  140. 
rRlCES— 

problem  of,  215-219. 
PRODUCTION— 
cost  of,  189-190. 
wealth,  factors  of,  8-11. 
PROMOTER— 

in  modern  business  (article),  257- 

275. 
work  of.  50.  57. 
PRr)PRIETOR— 
individual,  29-31. 

advantages  of,  29,  30. 
I  disadvantages  of,  30,  31. 

PROPRIETORSHIP— 

individual,  29-32. 
PROXY— 

use  of,  bv  stockholders.  89-91,  4«'0. 
PURCHASING— 

department,  137-141. 

RAILRO.-xn— 

organization  (article).  225-243. 

purchasing    department    (article), 
244-256. 
RECEIVER— 

duties   of,  362. 

friendlv.  363. 
RECEIVE'RSH  I  PS- 
corporate.  360-371. 
RENTAL— 

direct  money.  184. 
REORGANIZATIONS— 

corporate.  345-300. 
ROONf_ 

designing,  146. 
drafting.  146. 
tool.  147. 

SALES— 

department.  149-105, 
SECRETARY— 

of  corporation,  79. 
SELLING— 

community    of    interests    plan    of, 
150-158. 


500 


INDEX 


SELLING— Continued 

company,  156-158. 

contract  system  of,  159,  160. 

direct,  161-165. 

division  of  sales  department,  163- 
165. 

factor  system  of,  160. 

the  goods,  155-165. 

through  the  middleman,  155-160. 

through  the  retailer,  160,  161. 
SHOP— 

in  a  manufacturing  company,  147- 
149. 
SOCIALISM— 15,  16. 
SOCIETY— 

communistic,   14. 

co-operative,  16,  17. 

socialistic,  15,  16. 
SPECIALIZATION— 

results  of,  4. 
STOCK— 

capital,  in  corporate  charter,  73. 

certificates,  480-482. 

common,  63. 

how  determine  amount  of,  63,  64. 

inflation  of,  67-70. 

preferred,  64-66. 

provisions  of,  in  by-laws,  76. 

watered,  62. 
STOCKHOLDERS— 

liabilities  of,  99-103. 

provisions  of,  in  by-laws,  77. 

rights  of,  87-98. 


SYSTEM— 

brokerage,  156. 

commission,  156-158. 

contract,  159,  160. 

factor,   160. 

map  and  tack,  165. 

of  rewarding  laborers,  204-215. 

bonus,  205,  206. 

participation     in     ownership, 
213-215. 

pension,  215. 

piece  wage,  204. 

premium',  206-210. 

profit-sharing,  210-213. 

TRAFFIC— 

department,  166-168. 
TRANSPORTATION— 

organizations  needed  by,  21. 
TREASURER— 

of  corporation,  80. 
TRUSTS— 

advantages  of,  180. 

disadvantages   of,   181. 

early  character  of,  288. 

financial    and    industrial,    relation 
of,  287-320. 

financiering    of    (article),   276-286. 

formation  of,  180. 

UNITS— 

business,  11-13. 


14  DAY  USE 

RETURN  TO  DESK  FROM  WHICH  BORROWED 

LOAN  DEPT. 

This  book  is  due  on  the  last  date  stamped  below,  or 

on  the  date  to  which  renewed. 

Renewed  books  are  subject  to  immediate  recall. 


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NOV    1  1974  8  V. 


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Un-D     JUL  13  1982 


LD  21A-60m-7,'66 
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General  Library 

University  of  California 

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